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Don’t Misunderstand Independent Contractors v. Employee Classification

Posted on 03 Dec 2018

Don’t let this happen to you. In June 2015, FedEx settled with workers in California for $228 million  who sued the company for misclassifying them as independent contractors instead of employees. Workers in many other states have also filed suits against FedEx for this misclassification which deprives individuals of employment benefits such as workers compensation, unemployment insurance, pension plans, etc. While these payroll expenses can add 20-40% to labor costs, not understanding or knowing the rules (or laws) can be dangerous and far more costly. This is so true now with the 2017 Tax Act that includes Internal Revenue Code § 199A pertaining to independent contractors.

The article in Forbes, “What Is An Independent Contractor? Here’s Why It Matters Under the Trump Tax Law”, states that,

the 2017 Tax Act includes new Internal Revenue Code § 199A, which provides that individuals who are independent contractors can qualify for a 20 percent tax deduction on their independent contractor income without further requirements being met as long as they are engaged in a trade or business and make less than $315,000.00 in taxable income with their spouse if they are married filing jointly, or $157,500.00 of taxable income if filing a single return.”

This is great tax relief for individuals who truly are independent contractors and could be motivation for some to try to reclassify their status from employee to independent contractor. Businesses might also want to persuade their workers to reclassify to independent contractors to avoid payroll taxes, worker’s compensation and unemployment benefits. But not so quick. You really need to understand the rules of this game.

The Forbes article explains how misclassifying employees and independent contractors can be “harsh” for companies and individuals. The IRS will be watching closely for any reclassifications and proposed regulations will allow the IRS to still treat any employee who changes his status to independent contractor as an employee. The person will have to prove that he/she is in fact an independent contractor. The author states, “Employee relationships will thus be viewed as “sticky” and not easy or safe to change or adapt.”

An individual can file form SS-8 with the IRS claiming that his employer misclassified him as an independent contractor depriving him of worker’s comp, pension and other employment benefits. Sometimes this is done out of spite, but the IRS will investigate the claim with the business. It’s a good practice to understand clearly the definitions of independent contractors and employees. According to the Forbes article, in 2018 the IRS adopted new guidelines that are based on three primary factors: behavioral control, financial control, and the relationship of the parties. There are also 20 other factors that are subcategories of those three. The article has a great chart that helps explain the differences in relationships between businesses and employees v independent contractors.

We have businesses all across the United States, Canada and Puerto Rico who use our online time clock system to track time for their remote employees and we care deeply for all of them. The legal differences between employees and independent contractors are vital to understand. We believe that while some businesses may employ deceptive practices to save on payroll expenses, many just don’t have a clear grasp of the laws.

Whether you have employees or legitimate independent contractors, you should still track their time worked against job budgets and get alerts for no-shows. Chronotek’s clock in, clock out telephony and mobile app time clock system is your best help. Just so you know…

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