Sep 105 min read

Is Your Independent Contractor Really an Employee?

Watch the video below or scroll down to read the recap

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In this workshop, we cover all things concerning proper worker classification in conjunction with the U.S. Small Business Administration and the WV Small Business Development Center.

Presentation Slides:

Misidentification and the Economy

Adding economic costs & denies benefits
Big losses to Social Security and Medicare Funds
Undermines the economy
Growing issue
- Gig economy is expanding 3x faster
- Over 50% of the workforce likely to join the gig economy by 2027.

Today

Types of Workers
Internal Revenue Service (IRS) Test
Department of Labor (DOL) Test
Contractor Documentation

5 Types of Workers

Statutory Employees
Statutory Non-Employees
Independent Contractors
Employees
Government Workers

Statutory Employees & Statutory Nonemployees

Statutory Employee: Worker who by law is considered an employee.
Statutory Nonemployee: Worker who by law is NOT considered an employee

Statutory Employees

Always Employees:

Drivers - Beverages (not milk), Meat, Fruit, Vegetables, Bakery Products, Laundry/Dry
Life Insurance Agents - Work primarily for one company
Home Workers - Business supplies goods, then goods returned to business, Business specifies how work is done
Traveling Sales - Goods are merchandise for resale/supplies for operation
Salesperson's principal business activity

Always Contractors

Direct Sellers - Payments related to sales/output, Written contract will not be employee
Real Estate Agent - Payments related to sales/output, Written contract will not be employees
Companion Sitters - Not employed by service

Internal Revenue Service

Degree Control
Independence

IRS Degree of Control

Financial factors, Behavior factors, and Relationship factors all point to the Type of Worker

*Note: there is no magic number of factors. The key is to examine the entire relationship.

Behavioral Control

How much control over the activities of the worker has the business owner reserved the right to direct?

Types of Instructions Given
The Degree of Instruction
Worker subject to Evaluation System
Indicates employee
Business provides training
Indicates employee

*Note: The more detailed the instructions, the more control the business exercises over the worker.

Financial Control

Does the business have the right to control economic aspects of the worker’s activity?

Does the worker have…

Significant investment in equipment
Unreimbursed expenses like business filings
Opportunity for profit or loss
Makes services available to other businesses
Payment method usually not hourly
Flat Fee

*Note: If a worker has a significant investment in the tools/equipment and has unreimbursed expenses, the worker has a greater opportunity to lose money and thus more likely an independent contractor.

Type of Relationship

How does the worker and business perceive their relationship to each other?

Is there a--

Written contract?
Contract alone is not proof of IC status
Employee-type benefits provided?
NOT provided to real IC
Relationship mostly permanent?
Indefinite relationship indicates employee
Key business activity?

*Note: If a worker provides key services to business operation, it’s more likely that

the business has the right to direct/control the worker’s activities.

What About Officers?

Officers are normally employees when they work in the business

Officers are not employees if--
Perform no/minor services
Not entitled to compensation (direct or indirect)

*Note: Think you got it wrong? See the Voluntary Classification Settlement Program | Internal Revenue Service (irs.gov )

Fair Labor Standards Act (FLSA)

Newer regulations
Now Conforms to courts’ FLSA interpretation
Totality of circumstances analysis

*Note: Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA) | U.S. Department of Labor (dol.gov )

Economic Reality of the Relationship Test

Integral to Business, Managerial Skill Affects profit/loss, Investments, Skill and Initiatives, Permency, and Employer Control affect Type of Worker

Guidelines

No one factor is weighted more than any other.
Certain factors are unimportant in determining whether there is an employment relationship. the place
- where work is performed
- the absence of a formal employment agreement
- whether an alleged independent contractor is licensed by State/local government

Trouble Areas

Construction workers
Franchisees
Volunteers
1. Employees can’t volunteer services to employer
Trainees/Students
1. Depends on the activities
Home Workers
1. Entitled to all benefits of the law

Exemptions

Minimum Wage and Overtime - Professionals, Seasonal amusement/recreation, Small newspapers, Newspaper Delivery, Part-time Farmworkers, Casual Sitters/Companions
Overtime Only - Transportation, Domestic Service, Motion Picture Theaters, Farmworkers
Partial - Hospitals/Residential care, Remedial Training, Fire and Police

Documentation for Contractors

As a business owner with independent contractors, you need to get this right

Formal Contract

Signed by both parties
Include--
- Detailed scope of work
- Changes clause
- Delivery schedule & deadlines
- Amounts & timing of payments
- Ownership of the work
- How and when is contract terminated
Plus language that says—
- Contractor is NOT employee
- There will be no withholding, etc.
- Contractor pays own expenses
- Contractor not eligible for benefits (because not employee)
- Contractor must provide proof of own liability insurance
- Contractor must provide proof of business registrations and licensing
Consider ordering a boilerplate from attorney

W-9 Request for Taxpayer Identification and Certification

Get the W-9 form from the independent contractor before work starts
- Certify taxpayer ID(EIN or Social Security Number)
- Certify isn't subject towithholding
- Certify exemption from some reporting and payments
- Not sent to IRS.
  - Keep in files for auditor if necessary
Used to create Form 1099-NEC or Form 1099-K 21

*Note: To check Tax ID numbers of payees, you can sign up to use the IRSe-Services site

Insurance

Keep Copies-

General Commercial Liability
Commercial Auto Insurance
Workers’ Compensation (if the independent contractor has employees)
Umbrella

You should consider

Subcontractor Default Insurance (SDI)

Business Registrations

Keep copies-

State, county or city business license
Special Licensing by Activity
- Contractors’ license (construction)
- Federal Business licenses
  - E.g., Alcohol, Tobacco, & Firearms
Professional licensing

Note: Records Retention

There are 2 Concerns:

Statue of Limitation - Breach of Contract
1. 10 Years
2. After breach or when plaintiff discovers the breach, whichever is later
Tax Filings - IRS
1. Fraudulent tax filing forever
2. Use electronic stroage system

Publication 583 (Rev. January 2021) (irs.gov )