Archive for November 2015

Employee vs. contractor: The difference

employee-or-contractorAt some point in a small business’s life, every owner might need extra help producing deliverables and need to enlist additional workers to cover the extra load. If they classify those workers improperly, business owners could encounter significant IRS penalties.

The IRS has announced a major initiative to eradicate misclassifications of employees and contractors in 2016. Let’s look at the differences between each class.

Should I pay this worker as a 1099 contractor or a W2 employee?

Over the past decade, the IRS has developed guidelines and rules to help small business owners make the right choice between independent contractors and employees. Facts that provide evidence of the degree of control and independence fall into three categories:

Behavioral Control: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial Control: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

The key is to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

Independent Contractor Defined

The general rule is that an individual is an independent contractor if the business has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.

Employee Defined

Under common-law rules, anyone who performs services for a business is their employee. If the business can control what will be done and how it will be done, the worker is an employee. This is so even when the employee has freedom of action. What matters is the employer has the right to control the details of how services are performed.

If you have any questions and worker classifications or what penalties you could incur, contact our office at (405) 341-7044.

Employee vs. contractor: Why it’s important

employee-vs-contractorThe holiday hiring season has just begun with companies adding more workers to handle the seasonal rush. As the economy picks up, holidays will be especially joyous for those who are able to find work.

However, for the employers who bring on extra employees and independent contractors, this tax year could be especially challenging. The IRS has announced its special focus for 2016 will be tackling improper classifications of employees versus contractors. It’s a hot button for the IRS and Oklahoma is especially guilty of the improper classification crime.

Over the last year the IRS’ budget has been slashed. They’ve laid off a third of their workforce and are now tasked with increasing revenue with less personnel. They need to find some fertile fields that can bring in additional revenue for the department. And one fertile field lies with reclassification of contract labor to employees. There are no new rules; the IRS is simply enforcing the ones they’ve already established.

The IRS will be digging into taxes from 2013, 2014 and 2015 to find improper classifications and hit businesses with penalties. If your business is found to have improperly classified contractors, the IRS will conduct an audit. While they’re at your office, they’re going to conduct an audit of all other aspect of your business to uncover additional tax errors and will add those penalties to the final bill.

Some of the penalties the IRS could issue include:

  • Not issuing a 1099 form
  • Not paying the appropriate amount of deposits
  • Not paying deposits

Each instance of failing to pay the appropriate amount of deposits could result in a 2.5% tax for each month the contractor worked for your company, up to 25%. If you didn’t pay deposits, you could be charged a penalty of 50% of all payroll taxes for contractors, not including interest and other penalties. There’s also a 9% tax for each instance of improper classification. Additionally, if the workers you paid as 1099 contractors are determined later by the IRS as W2 employees then you could be responsible for the worker’s federal income tax, social security and medicare taxes that were not withheld.

There were rumors in 2008 of the IRS cracking down on misclassification across the country. Instead they decided to focus on California and conduct a test audit. A staggering 83% of those audits had instances of misclassification. The most common error was failing to issue a 1099 form to the contractors.

This could significantly impact Oklahoma businesses in a very negative way. Retail and oil and gas are especially susceptible to errors in misclassification. If you have immediate concerns, contact our office at (405) 341-7044.