Does your business use independent contractors?

If your business hires independent contractors, you should be aware of recent actions taken by the federal government and state governments.  The problem occurs when a business classifies someone as an independent contractor instead of as an employee.

For some business owners, it can be very appealing to pay someone as an independent contractor instead of paying them as an employee.  For instance, a business owner usually does not have to withhold employment taxes for an independent contractor (the independent contractor pays the taxes directly).  Paying someone as an independent contractor is very simple – you pay them a certain amount and that’s it.  You don’t have to worry about unemployment, insurance, benefits, taxes and all of the other issues you have with employees.

But in reality, it’s not that simple.  Not everyone is an independent contractor.  Some people must be classified as employees.  And if you fail to classify them as employees, there can be serious consequences.  The IRS is looking into these classifications, as well as the US Department of Labor and certain state agencies.  Besides all of the taxes that aren’t being collected on people who should be classified as employees, there are issues of whether a person qualifies for unemployment, whether he or she is protected under the Fair Labor Standards Act, and whether he or she is “counted” under the Affordable Care Act.

Each of the agencies involved in monitoring these classifications has their own “checklist” of criteria for a correct classification as an independent contractor.  Most of the criteria involves the level of control over how, when and where the work is performed.  The following are links to see each checklist:

IRS – http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee

US Department of Labor – http://www.dol.gov/whd/regs/compliance/whdfs13.pdf

Florida Department of Revenue – http://dor.myflorida.com/dor/taxes/rt_employee.html

Business owners need to be careful of how they use independent contractors.  The US Department of Labor signed a memorandum of understanding with the Florida Department of Revenue on January 13, 2015.  This agreement allows the agencies to share information they have collected on businesses in order to enforce the rules regarding independent contractors.  You can read the release here:  http://www.dol.gov/opa/media/press/whd/WHD20150034.htm

It is possible for business owners to correctly classify someone as an independent contractor.  Effort should be placed on documenting the relationship in a good contract and evaluating how the work and communication will be conducted.  In the right situation, using independent contractors can be practical and profitable.  Business owners just need to be aware that not every worker can be classified as an independent contractor.