Can you spot the difference between an employee and an independent contractor?  If this answer doesn’t come readily to you, and if your business uses contractors, you’re in danger of landing in a pickle.  Why?  Because if you don’t know the difference, you may be in the 30 percent of employers who are misclassifying their employees as contractors.  Don’t be in that 30 percent!  If you learn the classification rules before the IRS and the Department of Labor stop by for an audit, that knowledge won’t come with a side of fines and back taxes.  So it pays to classify correctly, especially in a time when every business is trying to save money.

Many businesses are cutting back by classifying more workers as independent contractors.  Classifying a worker as a contractor can shave 30 percent off of labor costs, from savings in insurance, taxes, and overtime.  But if the IRS finds a contractor should actually be classified as an employee, your business will face stiff penalties.  To avoid this costly and all-too-common mistake, let’s learn how the IRS classifies employees versus contractors.

The IRS uses three characteristics to determine the relationship between businesses and workers: behavioral control, financial control, and type of relationship.  All of these factors will affect whether a worker is rightly an employee or a contractor.  A business with behavioral control has the right to direct or control how a worker performs the work, via instructions, training, or other methods.  A business with financial control has the right to direct or control the financial and business aspects of the worker’s job.  Finally, the IRS examines the type of relationship, or how a worker and the business owner perceive their relationship.

Here are some helpful tips to help you differentiate:

• If a worker is told how, when, and where to do work, this worker should be classified as an employee.  This includes necessitating arrival in the office by 8 a.m. every morning and adhering to a strict 30-minute lunch policy.
• If a worker is given a desired end result, but is free to determine how that result will be achieved, this worker is most likely a contractor.  You may stipulate deadlines and attendance at certain meetings, but how that deadline is reached is at the contractor’s discretion.
• If a worker needs your permission to do a project for another business, this worker should be classified as an employee.  Contractors work independently and are free to do work for whomever they choose.
• If a worker receives performance reviews or health insurance, or works without a contract, this worker should most likely be classified as an employee.  Contracted workers are most correctly classified when they operate under a written contract that lists start and end dates and expected responsibilities and results.
• If any doubt remains whether a worker is an employee or a contractor, consider seeking advice from an HR professional, legal counsel, or even the IRS.  Both employers and workers are able to file IRS Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, which lets the IRS make the classification call.

Don’t wait for an IRS audit to determine your business’ employment-tax compliance—make a preemptive strike with a Human Resources audit.  The experienced HR professionals at YES! Your Human Resources Solution can help you do that.  We’ll review your employee data and eligibility forms for compliance, and we’ll make recommendations to help your business avoid potential tax penalties.  (Of course, your legal team will want to be involved for the final changes!)

That’s just one benefit of a comprehensive YES! HR audit.  Just look at what we did for this Florida company:

A Florida service company hit a compliance snag as it expanded operations to California.  Its HR forms, practices, and processes, while compliant in Florida, did not meet California requirements.

YES! Solution: We conducted a thorough HR audit, reviewing I-9 employment eligibility forms, employment posters, employee files, the employee handbook, exempt and non‑exempt pay statuses, and on-boarding and termination processes.  Then we identified areas of noncompliance and provided recommendations.  Finally, the YES! team created the required forms and processes, and worked with management to implement a seamless compliance with California employment requirements.

Discover how your business can embrace the power of saying YES!  Contact us for a free consultation.