Can’t I Just Call All My Employees Contractors???

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In my personal experience, most of America has a general dislike for attorneys even though most people agree that lawyers provide valuable information and are a great asset to your team. I think most people are Starting a business and running a business is no easy task. In addition to actually executing your craft, you have to worry about all of the back end work such as managing employees and paying them properly. I’ve heard good-willed people tell other business owners, “Just call all your workers employees, it’s cheaper.” This, however, is one of the worst pieces of advice you can follow as a business owner. Here’s why:

The Law if Clear About Who Qualifies as a Contractor…and Most Workers Don’t Qualify

The federal government and states have spent countless hours and issued multiple publications explaining the differences between independent contractors and employees. The IRS looks at three factors: behavioral control, financial control, and the relationship between the two parties. California’s Department of Industrial Relations follows a multi-factor test as enumerated in S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341.

Following these factors makes it easy to determine who should be an employee and who can be classified as an independent contractor. When you have employees you are responsible for paying for workers’ compensation insurance and payroll taxes (hence the belief that it’s cheaper to just hire contractors). While paying employees may cost more in administrative fees than paying contractors, improper classification is not worth the risk.

The Cost of Misclassifying Employees

In California, the willful misclassification of employees as independent contractors creates civil penalties between $5,000 and $25,000 per violation.

The IRS imposes strict penalties for misclassifying workers, whether intentional or unintentional. For unintentionally failing to withhold federal income tax, the penalty is 1.5% of the wages paid. The penalty is doubled to 3% if the employer did not file a Form 1099-MISC for the worker with the IRS. The penalty for unintentionally failing to withhold the employee’s share of Social Security and Medicare taxes is 20% of the employee’s share of the tax. The penalty is doubled to 40% if the employer did not file a Form 1099-MISC for the worker with the IRS. If the misclassification was intentional, or if statutory employees are misclassified, the employer is liable for the full amount of both the federal income tax that should have been withheld as well as the employee’s and employer’s share of Social Security and Medicare taxes.

Chances are, if you’ve misclassified one employee, whether willfully or unintentionally, you’ve also misclassified other employees in your company. The state and federal governments both have the power to issue fines and penalties per misclassification. So, if you have 5 employees that are misclassified, that leaves you with $125,000 worth of exposure in the state of California, plus a percentage of the Social Security and Medicare taxes you failed to pay along the way…not worth it!

So, What to Do Now

To financially protect your business, take some time to determine whether your workers are in fact properly classified. Talk to an attorney (not an accountant because they are not trained to help you figure this part out) and see what steps you need to take to properly pay your workers. The extra expense to pay employee correctly will be worth it in the long run and it will save you thousands, if not hundreds-of-thousands of dollars in potential fines and fees.

Photo Credit: Pixabay

About author:
Asha Wilkerson is the founder of The Wilkerson Law Office, P.C. Ms. Wilkerson provides skilled advice and counsel to for-profit, non-profit, and faith-based organizations in the areas of business and employment law. Her mission is to preserve the longevity of your business by ensuring that every aspect of your organization is legally sound and operating in compliance with state and federal law.

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