It used to be that most employees had fixed hours and stayed at a company for 40+ years. This trend has been decreasing as more companies hire contract workers. Not only does this practice provide more flexibility to the hiring company, it also provides these contract workers greater flexibility in the work they pursue. In fact, according to survey research conducted by Lawrence Katz of Harvard and Alan Krueger of Princeton from 2005 to 2015, 94% of job growth was in the alternative work category, and over 60% was due to the rise of independent contractors, freelancers, and contract company workers. This constitutes nearly 10 million jobs!
If you cross the line between contractor and employee designation — even unknowingly — the Department of Labor (DOL) and Internal Revenue Service (IRS) can penalize you with some steep fines. Here are some basic tips regarding contract workers:
Make sure that you correctly classify your contract workers. You need to understand that:
When hiring a contract worker, you’ll want your agreement in writing. Specific language in your contract should state that the worker is an independent contractor. Additionally, specify the beginning and end date of the agreement. (Please note that even with all these precautions, a written contract may not be sufficient evidence to prove that your worker is a contractor rather than an employee.)
When hiring a contract worker, you must limit supervision. Typically, expectations are clearly outlined and a general timeline is given, but the contract worker is free to determine their own hours as long as the project is done within the time frame. In sum, contract workers:
There should be a clear line between employees and contract workers. In other words, you can’t lead third parties to believe that your contract workers are your employees by assigning them work email addresses, ID badges, etc. This blurring of the line outwardly can pose a problem when it comes to tax classifications.
As you can see, the line between contract worker and employee can be difficult to navigate at times. (Here’s a chart from the DOL that outlines the difference visually.) If any of these lines are crossed, the DOL and the IRS will be more likely to lean towards identifying your contract worker as an employee. Consequently, you’ll be responsible for paying back taxes, penalties for income taxes, wage and overtime compensations, Social Security and Medicare funds, and unemployment taxes. You may even need to provide the newly designated employee with benefits.
We want to help you avoid any such penalties. If you have questions regarding your worker classification, let us help you!