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Misclassifying Workers as Independent Contractors Can Be Costly.

Misclassifying Workers as Independent Contractors Can Be Costly.

By Solovic
Published: June 1, 2010

Statistics from the Department of Labor Statistics indicate hiring is on the rise for the first time in more than a year. However, because businesses continue to be concerned about the economy, many employers are choosing to hire independent contractors/freelancers as opposed to full-time employees. Misclassifying a worker as an independent contractor rather than an employee can be a costly mistake.

Using independent contractors in your business can save your business money. Independent contractors do;t get typical company benefits such as vacation and sick pay or health insurance/retirement benefits. Plus, you do-t pay social security taxes (FICA), or provide unemployment or worker- compensation. However, it is easy to blur the line between a true independent contractor and employee and the IRS is cracking down.

In order to be considered an independent contractor, a worker should meet certain criteria. Control is one of the primary determinators. What is your level of control over the worker? An independent contractor determines how and when work will be performed whereas an employe's work parameters are established by the employer. For example, if you require a worker to attend regular meetings, work set hours and use specific materials and equipment, then in most cases that worker is an employee because you are exercising significant control over his/her job performance.

Other factors include such things as:

  • Working relationship. Does the worker have other clients with whom he works or does he work exclusively for you? An independent contractor is in business for himself so he should have other clients or at least be in the market to acquire other business opportunities.

  • Work hours. An independent contractor should, in most cases, be able to set his own work schedule. As long as the contractor meets the deadline established by the client, he can decide his own work schedule.

  • Work location. Generally, an independent contractor provides for his own work location, materials and equipment. In other words, his primary office is not located at your compan's facility.

  • Expenses. Employees typically submit their work-related expenses to their employer for reimbursement. An independent contractor, however, generally absorbs expenses as part of the cost of doing business.

* Taxes. An independent contractor pays his own taxes by filing quarterly estimated tax returns. Your company does not withhold taxes.

If the IRS determines you have misclassified a worker as an independent contractor rather than an employee, get out your checkbook. You may be charged for back taxes, interest and penalties. In fact, there is even the possibility of criminal charges. And in some cases the misclassified worker has been able to sue the employer for lost benefits during the time in which he should have been considered an employee.

The IRS has a set of guidelines an employer can use to determine the proper status of a worker. After reviewing the criteria, if you are still uncertain, the IRS will make the determination for you if you file the form SS-8.

While in the short-term, using independent contractors in your business may save you money, it could cost you significantly more in the long-term. Make sure you choose wisely.

For more information, check out these articles on Business.gov.

How to Become an Independent Contractor.

Hiring Independent Contractors.

About the Author:

Susan Solovic
Susan Wilson Solovic is an award-winning entrepreneur and journalist, author of three best-selling books, multi-media personality and a small business contributor to ABC News and other media outlets, public speaker and attorney. In addition to sitting on several executive boards of small business organizations, Solovic is the CEO and co-founder of ItsYourBiz.com – a company she led from a concept to a multi-million dollar enterprise.(formerly SBTV.com) She is also a featured blogger on numerous sites including Huffington Post, AllBusiness.com, Constant Contact, WSJ.com and Fast Company. Her forthcoming book, It’s Your Biz: The Complete Guide to Becoming Your Own Boss, is scheduled for release in October 2011.