When should a worker be classified as an employee versus as an independent contractor?
What is the difference between these two types of workers? Why is it important for a hospice agency to properly classify the workers who are providing services? Why is it important to determine whether the workers providing services are independent contractors or employees?
Why would an employer want to classify workers as independent contractors instead of employees?
A business must withhold income tax, withhold and pay social security and Medicare, and pay unemployment taxes on the wages paid to employees – but not those paid to independent contractors. By classifying workers as independent contractors, an employer can avoid payroll taxes, unemployment insurance and workers compensation coverage. The employer can also save on the cost of all the benefits that are offered to employees but are not offered to independent contractors.
Are there consequences to misclassifying workers?
The IRS is increasing its efforts on auditing companies, with a particular focus on worker classification. The liability from an employment tax audit that identifies misclassified workers may be quite significant. A business that classifies workers as independent contractors instead of employees may be subject to retroactive tax withholding, penalties, and interest.
How can an agency differentiate between an employee and an independent contractor?
An employee is typically a person who is providing services where the employer controls what services are provided and how the services are provided. Specifically, the employer has the right to control the details of how the worker performs the tasks. There are three key areas to consider when evaluating whether a worker is an employee or an independent contractor:
- Behavioral control: Is the worker free from control or direction over performance of the tasks? Or, does the employer have the right to control how the worker performs the tasks?
- Financial control: Is the worker engaged in independently established business or occupation? Or, does the employer control the financial and business aspects of the worker’s job? For example, does the employer control how the worker is paid? Does the employer provide the supplies and the tools that the worker requires to complete the tasks?
- Relationship between the parties: Does the employer provide the worker with benefits such as insurance, vacation pay, or pension plan? Are the services that are performed a key aspect of the business?
By considering the different aspects of behavioral control, financial control, and the relationship between the two parties, and employer can determine whether a worker is more appropriately classified as an employee or as an independent contractor. Each of these three key areas involves multiple factors. Determination of whether a worker is an employee or an independent contractor is not an objective test and some of the factors are more important than the others, depending upon the industry and type of independent contractor being evaluated.
Where can you find out more?
- Factors for evaluating whether a worker is an independent contractor: Factors – evaluate independent contractor
- IRS website on worker classification: IRS – worker classification
- Example of recent classification violation: News – employee misclassification