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Employee classification is tricky business. What makes someone an employee?
We've outlined the difference between part-time and temporary workers.
Scenario 1: Bridal Jewelers needs a bookkeeper for three hours every Tuesday to process payroll. The work is very specific and must be performed at the store using the business computer. The rate is $25 per hour. Is the individual an employee or an independent contractor?
Scenario 2: Jiffy Used Cars hasn't had its bank statements reconciled for a year. Not all checks have been recorded, so the individual hired to perform the work has to reconcile the bank statements using the company's bookkeeping software. The work needs to be performed one time and will require two or three days of work. The rate is $25 per hour. Is the individual an employee or an independent contractor?
Scenario 3: Majestic Engineering has just decided to institute a new policy for handling expense reimbursements to employees. The company wants to hire a technical writer to prepare the new section of the Employee Handbook. The writer has to meet with the company's representatives in order to gain an understanding of the new policy, and he will be paid a flat fee. Is the individual an employee or an independent contractor?
Employee Vs. Independent Contractors
Why Make Someone An Employee?
Psst...Want a shortcut? You can check out how to classfy full-time vs contractor empoyees with this two-minute video.
The inclination of some employers is to hire and pay all of these individuals as independent contractors.
The part-time worker (Scenario 1) is only earning $75 every two weeks. The temporary worker (Scenario 2) will earn a one-time amount between $400 and $600
The U.S. Treasury Department estimates that a provision to prevent misclassification in the 2013 budget will bring in $8.32 billion in federal revenue over the next 10 years.
Neither one could qualify for benefits, so why go through the effort of hiring either one as an employee?
In our article Employee Versus Independent Contractor: How to Tell the Difference?, we showed that the difference is primarily a matter of control. And pages 7-9 of this IRS Publication, Employer's Supplemental Tax Guide, provide detailed definitions of independent contractors.
It's important to note: the definitions don't indicate that the amount of time spent by a worker to complete the work is considered in determining whether or not an individual is an employee or an independent contractor.
For instance, Scenario 3's individual is an independent contractor. Majestic Engineering has no control over how, when, or where the contractor performs the work. There is also the possibility of either a profit or a loss, especially if the work takes too long to complete. The individual will provide his own materials and transportation to and from Majestic's offices.
But what about Scenarios 1 and 2?
In Scenario 1, Bridal Jewelers controls where the work is performed, when it must be done, what work is performed, and how it is to be done.
So the individual is an employee, not an independent contractor. Every two weeks he receives a net paycheck of $69.26 ($75 wages minus $5.74 in FICA taxes.) In fact, one of his tasks is to pay himself for the previous time he worked.
Learn how to correctly classify all seven employee types.
In Scenario 2, Jiffy Used Cars still has control over what work is to be performed, how it should be done, where it should be done, and when it should be done — even though the work is only temporary.
Although the individual may only be working for two or three days, the employer must still go through the process of hiring the employee, having the employee complete all necessary paperwork, withholding taxes from the employee's pay, and reporting all wages and withheld taxes on Form W-2.
Could Jiffy Used Cars have avoided paying someone as an employee to perform the work? Yes. They could have hired someone through a temporary agency, or they could have hired a freelance bookkeeper and relinquished much of the control.
Potential for Profit or Loss
When identifying whether or not a worker is an independent contractor, one factor is whether or not the individual has the potential for profit or loss.
A freelance bookkeeper, assuming that the work would take up to three days, could quote a fixed fee of $600, based on his projected rate of $25 per hour. He could arrange to collate all of the bank statements, reorder all of the canceled checks, and locate all of the missing checks working from his home office. The only task he would perform in the company's office would be to complete the reconciliations using the company's bookkeeping software. If the work took more than three days to complete, the bookkeeper would lose money on the project.
So the amount of time spent on a job is irrelevant. Even part-time and temporary workers must be paid as employees if the employer has behavioral and economic control over how the work is performed.
Making the correct distinction is critical; you'll run into numerous consequences if you misclassify your employees or contractors. And Justworks can help you make the correct choice and pay your workers correctly.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.