As a leading provider of payroll services for small business, one of the persistent topics we deal with is the classification of workers. Where most small business employees are hourly or salaried workers, there is that small minority that provide services as independent contractors. The onus is on employers to make sure each worker is correctly classified for payroll and tax purposes.
The problem with classifying workers is the fact that the IRS does not offer a list of black-and-white rules that clearly define the difference between independent contractors and legitimate employees. They offer guidelines, but there is plenty of gray within those guidelines.
The best way for us to help clients sort this out in especially ambiguous cases is to look at recent court rulings. For example, take the case of an insurance company discussed on the Bloomberg BNA website in a September 6 (2017) post.
Independent Sales Agents
The case in question revolved around an insurance company that hired sales agents to sell their products. To make a long story short, the sales agents were hired as independent contractors but were expected to perform their duties according to strict company policies. Some of those policies required sales agents to do things that would normally apply only to salaried employees.
After a length of time, a number of sales agents got together and took the insurance company to court. They maintained that the company was exercising so much control over their daily activities that they were actually salaried workers rather than independent contractors. They won their case. The court based its decision on the fact that managers exercised almost complete control over agent activities.
Independent control over daily work tasks is usually the deciding factor when attempting to classify workers who operate in a gray area. If a group of workers do not have nearly complete control over how they complete daily tasks, they are more likely than not to be considered salaried employees by the IRS. On the other hand, employees free to complete daily tasks in any way they see fit are more likely to be considered independent contractors, provided all the other IRS guidelines are also met.
Why It Matters
Proper classification of workers may not seem like a big deal to some small business owners with only a handful of people on the payroll. Our experience as a provider of payroll services for small business has taught us that it is a very big deal. Getting it right matters because the IRS is involved.
Federal law requires employers to withhold payroll taxes from all salaried and hourly workers. The withheld monies must be combined with employer contributions to make quarterly FICA payments. Employers must also keep meticulous records of all withholding.
Where independent contractors are concerned, employers are not required to withhold and pay payroll taxes. Independent contractors are considered self-employed under the law and, as such, pay those taxes themselves. However, an employer must furnish a 1099 form to any independent contractor who earns at least $600 in any given tax year. Failure to do so could result in IRS penalties.
It is absolutely essential that businesses correctly classify their workers. As the insurance company profiled in the Bloomberg BNA story found out, hiring workers as independent contractors but treating them as salaried workers runs afoul of the law. There are consequences for doing so.
Here at BenefitMall, we know all the ins and outs of worker classification. If you choose us as your online payroll provider, we will make sure all your workers are correctly classified.
Bloomberg BNA – https://www.bna.com/treatment-insurance-agents-n73014464183