Worker Classification - Employee Vs. Seasonal Employee Vs. Contractor
As a small business owner, you need to ensure you are correctly classifying the individuals who are performing services for your business. Is the individual a contractor, an employee, or a seasonal employee?
Many businesses attempt to classify workers as contractors in an attempt to avoid paying employment taxes to the federal and state governments. In recent years the IRS has formed special teams to search for misclassified workers under the ETE (employment tax examination) program. Failure to properly classify workers can result in hefty fine and penalty assessments by the IRS, sometimes as high as 35% of the tax bill.
Use the below outline to help guide staffing and classifciation decisions:
EMPLOYEES:
The worker is hired to provide services to a company on a regular basis in exchange for compensation and the worker does not provide services as part of an independent business.
The candidate's responsibilities include:
The worker is hired for a short-term assignment, not to exceed 6 months, and the person doesn't provide services as part of an independent business.
The candidate's responsibilities include:
The worker is providing services as part of an independent business. The person may be an employee of a third-party vendor (consulting firm or temp agency), or may work for their own company. Addtitionally, the person seeks work as an independent company from multiple companies.
The candidate's responsibilities include:
Many businesses attempt to classify workers as contractors in an attempt to avoid paying employment taxes to the federal and state governments. In recent years the IRS has formed special teams to search for misclassified workers under the ETE (employment tax examination) program. Failure to properly classify workers can result in hefty fine and penalty assessments by the IRS, sometimes as high as 35% of the tax bill.
Use the below outline to help guide staffing and classifciation decisions:
EMPLOYEES:
The worker is hired to provide services to a company on a regular basis in exchange for compensation and the worker does not provide services as part of an independent business.
The candidate's responsibilities include:
- Provide Form W-4
- Provide proof of eligiblability to work in US
- Report hours worked (required for hourly employees)
- Comply with company’s employment policies
- Perform all job responsibilities satisfactorily
- Pay agreed-upon compensation
- Withhold payroll taxes from such compensation
- Pay employer payroll taxes (7.65% of gross pay)
- Provide fringe benefits
- Maintain non-discriminatory and safe work environment
The worker is hired for a short-term assignment, not to exceed 6 months, and the person doesn't provide services as part of an independent business.
The candidate's responsibilities include:
- Provide Form W-4
- Provide proof of eligiblability to work in US
- Report hours worked (required for hourly employees)
- Comply with company’s employment policies
- Perform all job responsibilities satisfactorily
- Pay agreed-upon compensation
- Withhold payroll taxes from such compensation
- Pay employer payroll taxes (7.65% of gross pay)
- Not required to provide fringe benefits
- Maintain non-discriminatory and safe work environment
The worker is providing services as part of an independent business. The person may be an employee of a third-party vendor (consulting firm or temp agency), or may work for their own company. Addtitionally, the person seeks work as an independent company from multiple companies.
The candidate's responsibilities include:
- Provide Form W-9
- Provide invoices for services performed
- As any third-party vendor, contractor is responsible for all taxes
The company's responsibilities include:
- Company has the right to control or direct only the result of the work, not the means of accomplishing the result
- Process invoice for payment and make timely payment
- Pay vendors electronically via ACH, or by check
- Provide Form 1099, if appropriate