Failure to Classify Your Worker Correctly as Either an Employee or a Contractor

What does this mean?

If you have employees, you’ll need to pay related taxes and give certain benefits. A lot of people skip certain requirements because they don’t think they need to do anything. This could be because either they didn’t know or they thought their “employee” was actually a contractor.

No contract can determine automatically whether a worker is a contractor or employee. The only determining body for that are judges and the IRS and DOL.

Does this apply to me?

If you have independent contractors then, yes. While there are some taxes, like FUTA, that applies only if you meet certain qualification, the others apply to all. Some apply even if you’re self-employed.

Why is making this mistake going to hurt my business?

Failure to comply with these obligations could mean both interest and penalties, in addition to backpay. It’s truly a problem though because if you misclassify an employee as a contractor, that “mistake” could destroy your business as it would suddenly have to account for tens of thousands of dollars that you didn’t budget for.

So, it’s going to be extremely expensive. The government pursues collection on these types of taxes aggressively and relentlessly--”relentlessly” because these taxes won’t be discharged if you file for bankruptcy and in many cases the government will pursue payment from the individual owners despite the company being a separate entity.

You could avoid this by:

Making sure you have a good grasp of the distinction between IC’s vs. employees and that you’re not misclassifying independent contractors. You also need to take measures to ensure you have the classification you want.


Example:

Will hired Spencer as a contractor for Salesly. Will thought Spencer did great work and began delegating additional work to him. So much work, in fact, that Spencer was practically running the company himself.

Spencer got to the point where he had to turn down any other project that came his way because his job with Will took up 100% of his time. Will started asking Spencer to work in the office and be there until at least 4pm each day.

3 years later, Will got a letter from the IRS notifying him that Spencer was misclassified as a contractor. Spencer had continued working for Will up to that point, so Will owed 3 years worth of paid holidays, leave, the difference between Spencer’s payment and the statutory minimum wage, insurance, and taxes.

Will could’ve avoided this had he better understood the difference between a contractor and an employee.

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