As tempting as it may sound to classify your fringe workers as Independent Contractors, Beware! The EDD and the IRS are working together to crack down on misclassified employees and are seeking to boost their revenue in this down economy.
Sure, there is much less compliance paperwork, no workers’ compensation, no withholding, no payroll and no employment law liability, but don’t be too quick to take the easy path. Saving a few dollars now may not be worth the fines and penalties later should you get it wrong, and it’s easy to get it wrong.
Let’s review some basics about Independent Contractors and the EDD’s efforts to be sure you are in compliance.
The Crackdown
Every CPA and accountant will tell you, the EDD and the Federal Department of Labor in particular, are on a mission to ferret out any misclassified Independent Contractors and convert them into employees. They say this is for the sake of the poor contractor that needs to be protected. In reality however, they will be more than eager to send you assessments for personal income tax, state disability income, unemployment insurance and employment training taxes and overtime. The fines are steep!
The Misconceptions
It’s critical that we differentiate between Independent Contractors and Employees for all of the above mentioned reasons. Whether it’s due to a simple misunderstanding of the IC criteria or an intentional effort to skirt around the edges of the law, misclassification can cost you a bundle. Let’s look briefly at a few of the critical differences:
Control
Employee – under company control as far as schedule, hours, pay, and at-will status
Independent Contractor – works independently according to his/her own hours and direction
Training and Work Methods
Employee – trained in your work methods and works according to your direction.
Independent Contractor – not trained by you and expected to use his/her own preferred methods.
Pay
Employee – paid by the hour or according to a salary at regular intervals
Independent Contractor – paid according to his/her own rates and schedule by invoicing the business
Integration with Business
Employee – the business relies on the efforts of employees to produce its’ primary product or service
Independent Contractor – support only, work does not create or produce the primary product or service
Of course a detailed analysis of the differences is far more complex than this comparison. While the “right to control” the manner, means, method and mode of performing the work is the key test, there are many other “factors” that must be weighed, all of which are designed to determine if the worker truly has his/her own business, which is independent of yours.
Bottom line – any CPA will tell you that businesses today are facing an onslaught of scrutiny when it comes to classifying Independent Contractors. If you need advice regarding an existing problem or help determining if you are in compliance, please don’t hesitate to contact Champion right away. We offer 60 minutes of free consultation.
