Employee vs. Independent Contractor, the Difference can prove costly.
Submitted by Melinda Guzman, Esq
Finding quality, dependable help can sometimes prove difficult, especially for small businesses. Issues of loyalty, dependability, and cost often dictate hiring decisions. But once an employer has hired an individual for services, that person’s classification as either an employee or an independent contractor can make a huge difference in the employer’s tax responsibilities. A mistake in classification could prove costly to the employer.
Employers must meet certain legal obligations for employees, which do not otherwise exist for independent contractors. These obligations include, but are not limited to withholding income taxes, withholding and contributing to Social Security (FICA), contributing to the Federal Unemployment Tax Act (FUTA), filing quarterly income tax withholding and FICA’s return in addition to an annual FUTA return, and furnishing withholding statements to each employee. In addition, employers must pay employees a specified minimum wage and provide Workers Compensation Insurance.
The consequences of mischaracterizing the status of employees can prove costly. Employers can be held liable for unpaid taxes with interest, penalties, and imprisonment in extreme situations, in addition to satisfying contributions for unemployment insurance, workers compensation insurance, and other failed obligations.
The Internal Revenue Service (“IRS”) and other governmental agencies have tended to favor the “employee” status. As a result, it has become increasingly difficult to prove “independent contractor” status for full-time employees who perform tasks essential to the business existence.
The IRS has established a “20 factor test” to determine whether the individuals you hire are employees or independent contractors. Generally, the relationship turns on whether the person for whom the services are performed (the employer) has the right to control and direct the individual hired to perform the work, not only as to the result to be accomplished by the work, but also as to the details and means by which that result is accomplished.
Melinda Guzman, Esq. serves as General Counsel of the California Hispanic Chambers of Commerce. She served as General Counsel of the United States Hispanic Chamber of Commerce and the United States Hispanic Chamber of Commerce Foundation from 2004 – 2010 and as Chair of the California Hispanic Chambers of Commerce from 2000 – 2004. She also serves as director of the Federal Home Loan Bank of San Francisco, and has served as Trustee of the CA State University and of the CA Community Colleges. She is highly respected as a litigator, business counselor and small business advocate. She may be reached at 916-551-2906 or firstname.lastname@example.org.