Employees Vs Contractors

I know it’s tempting as a business owner to classify all of your workers as independent contractors. I mean, I understand. You avoid paying income taxes, social security and medicare taxes, and unemployment taxes. This saves you a lot of money. You don’t have to pay overtime or reimburse business expenses, etc. But, not so fast, my friend…. you do not want to get caught with your proverbial “hand in the cookie jar” of improperly classifying employees. Let’s look first at what an employee is and isn’t and then we will look at the potential penalties for getting it wrong.

What makes an employee …. well, and employee?

1. You control their behavior.
   • Do you tell them what time to show up for work?
   • Do you tell them where to work?
   • Do you give them specific instructions on what to work on and when?
   • Do you provide training on how to do their job?
2. You have financial control.
   • Do you purchase / provide the tools / equipment needed for their work?
   • Do you pay based on hours or commission from sales?
   • Do you expect your worker to work solely for your business?
3. Relationship is another key indicator.
   • Is your intention to keep this worker indefinitely?
   • Are they services provided a key activity of the business?
   • Are you providing benefits such as insurance, pension plans, vacation/ sick pay, etc?

The more yes answers you have for the above questions, the more likely that you have an employee and not an independent contractor.

What are possible mistakes that could lead to penalties for misclassification?

I am not going to list every possible mistake, but I do want to layout how serious this is and, hence, how you should not make this decision lighlty.

1. You didn’t pay overtime
2. You didn’t keep proper records of hours worked
3. You didn’t pay employer contributions to social security and medicare taxes
4. You didn’t submit W2 forms.
5. You didn’t make appropriate contributions to retirement plans.
6. You haven’t complied with the ADA.
7. You haven’t provided proper notifications and material for OSHA or the NLRA.

If the above concerns aren’t enough for you…. if the IRS determines that you willfully chose to misclassify your employees, you could be slapped with a criminal conviction. This includes potential jail time and fines.

So…. JUST DON’T DO IT unless you are confident. My recommendation would be to consult with your lawyer or an HR specialist before making this very important determination.