Wertz & Co Announces Employee vs. Independent Contractor as a Critical Issue for Business Owners

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The U.S. Department of Labor and the IRS have announced an increase in investigation of companies that may have wrongly classified employees as contractors. Since the penalties for misclassification can range from a few thousand to millions of dollars, Wertz & Co has announces tips for proper classification.

Companies may be tempted to treat some workers as independent contractors to save on expenses. But if the circumstances surrounding the relationship are indicative of an employer-employee relationship, the company could find itself in trouble.

Hiring independent contractors rather than full-time employees can offer significant cost savings to employers of all sizes. But as reported by Anne Baxter in Grand Forks Herald, the U.S. Department of Labor and the IRS are not shy about investigating companies that may have wrongly classified employees as contractors. And the penalties for misclassification can range from a few thousand to millions of dollars.

Wertz & Company, an Irvine tax firm, believes that with two separate branches of the U.S. government actively investigating businesses that misclassify workers, it’s more important than ever for business owners to understand the difference and get it right.

“Proper classification of workers as employees or independent contractors is a critical issue for today’s employers,” says Greg Tanner, a tax principal at Wertz & Company. “Companies may be tempted to treat some workers as independent contractors to save on payroll taxes and other costs. But if the circumstances surrounding the working relationship are indicative of an employer-employee relationship, the company could find itself in trouble.”

Generally, the employee/contractor classification is determined by the behavioral and financial control of the worker. The IRS has identified a number of factors that can be used to determine whether an individual is an independent contractor or an employee. These include:

  •     Control of when, where, and how the worker performs services. Providing instructions on when, where, and how the worker is to work generally indicates an employer-employee relationship. Independent contractors tend to have control of these matters.
  •     Training. Training and a requirement to attend meetings are indicative of an employer-employee relationship.
  •     Requirement that services be personally performed. Independent contractors are often not required to personally perform the services. However, there are exceptions.
  •     Length of relationship. A long-term continuing relationship indicates an employer-employee relationship. However, this factor alone is not enough to make the determination.
  •     Work schedule and total hours of service required. A set schedule indicates the control of an employer in an employer-employee relationship. Provision of services while performing services for others suggests an independent contractor relationship.
  •     Control over technique or sequence. Employer control of the manner in which the worker performs required tasks suggests an employer-employee relationship.
  •     Reports to firm. Submission of regular or periodic reports suggests a degree of control indicative of an employer-employee relationship. However, such a requirement may also exist for an independent contractor.
  •     Payment method. Payments by the hour, week, or month suggest an employer-employee relationship. Payment by the job or based on invoices submitted by the worker are indicative of an independent contractor relationship.
  •     Work-related expenses. Payment of the worker’s business and travel expenses suggests an employer-employee relationship. However, reimbursement of business and travel expenses might also be part of the arrangement between an independent contractor and the firm.
  •     Location and work facilities. The requirement that services be provided on the firm’s premises suggests an employer-employee relationship. Provision of work facilities, including tools, by the worker – especially if of a type not generally maintained by employees – indicates an independent contractor relationship.
  •     Profit and loss potential. Workers likely to profit from the success of an enterprise and at risk of experiencing a loss on its failure are usually independent contractors. Workers paid a fixed rate based on time with no possibility of loss are more likely employees.
  •     Restrictions on customers and clients. Workers who offer their services to the public on a regular, consistent basis are less likely to be employees.
  •     Termination. The ability of the firm and worker to terminate the relationship for any reason without penalty indicates an employer-employee relationship.

“Keep in mind that all facts and circumstances surrounding the relationship are considered during the classification process,” cautions Tanner. “None of the individual factors is determinative, and not all factors will be present in all cases. When in doubt, the best policy is to consult with a knowledgeable human resources professional or labor law attorney.”

About Wertz & Company
Wertz & Company is an Irvine tax firm that specializes in working with entrepreneurs and business owners along their journey to success. The firm offers accounting, financial planning, estate and wealth management planning, tax preparation, and other management consulting services in a personal, proactive, responsive manner. With a strong commitment to the local community, Wertz & Company contributes to several different charitable endeavors. For more information, visit http://www.wertzco.com.

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