“Are the people that I hire employees or independent contractors?”
This is one of the most common questions that we get from our small business clients and one of the more challenging to answer. I will lead with the caveat that all states have their own laws regarding personnel classification but there are some common tests that can give you confidence when making the decision.
The tests that are generally enforced to determine employment status are:
- Does the person provide their own equipment to fulfill their job duties?
- Do they have their own business and/or entity number with the IRS or State? Do they have or pay their own workers compensation?
- Do they advertise or solicit for other work within their current job duties? Are these pursuits hampered by their employment with you?
- Have they filled out a W-9?
- Do you, as employer, determine when, where and how their duties are fulfilled?
- They have a separate place of business?
- Do they complete their job duties in your office?
There are also many common myths about determining employment status. Such as…
- If you issue a 1099 at the end of the year then they are contractors? False
- The worker has been an independent contractor in the past so they must be now? False
- Independent contractors are an established practice in my field so they must be contractors? False
- Anyone who works off-site is an independent contractor? False
Using these tests, as a business owner, you can determine how to classify every person that works for you. When in doubt you would be well advised to classify workers as employees.
The unemployment insurance departments of many states will take a very aggressive approach to reclassify independent contractors to employees. Once the state agency has reclassified independent contractors to employees you will have a difficult time overturning that decision and it could have a ripple effect with the IRS.
If you have any questions with regard to employment classification, please contact your accountant for advice.
