We have used previous blog posts to discuss how employees are classified for payroll purposes. There is a definite, but ambiguous, distinction between genuine employees and independent contractors. Genuine employees are afforded certain rights and benefits that independent contractors are not. Employers have to be very careful about employee classifications in order to avoid running afoul of those rights.
A new report from Virginia-based MBO Partners offers yet another reason for employers to be very careful about worker classification. That report shows that more freelancers than ever before are now earning six-figure incomes. Though the total number of freelancers actively working his fallen by some 700,000 this year, the number of active freelancers earning in excess of $100,000 increased by just under 5%. In raw numbers, more than 3 million freelancers are now earning six-figures.
Why should this matter to employers? Because a drop in the number of active freelancers combined with an increase in the number of freelancers earning six-figure incomes is sure to raise a red flag with Uncle Sam. It is highly likely that the IRS will use the latest numbers as a reason to more carefully scrutinize how companies classify workers. It's not beyond the realm of possibility that they would take a very close look at companies with an unusually high volume of payments to freelancers.
An Ambiguous of Federal Definition
The issue of genuine employee versus independent contractor has always been a tenuous one thanks to the government's ambiguous definition. If you were to look up the IRS guidelines on this topic, you would find half a dozen bullet points suggesting ways you could tell if a worker was a genuine employee or a contractor. But none of the bullet points offers any solid, black and white rules you could apply.
Perhaps the most accurate litmus test employers can use to determine worker status is the amount of control the employer exercises over the worker's day-to-day business. For example, an employer that requires a worker to report to the job site at the same time every day, then controls all the activities performed by the worker would generally be considered the worker's direct employer.
What makes contractors different in this regard is that they maintain primary control about when and how they do their work. A truly independent contractor is a self-employed individual who serves clients by providing necessary services. He or she determines when to work, how often to work, and how to provide services in a way that meets the client's needs.
An Outsourced Payroll Solution
Our brief explanation of genuine employee versus independent contractor is by no means comprehensive. There are many other things to consider when classifying workers. Unfortunately, you may not have the time, resources, or interest to get into the issues. The good news is that an outsourced payroll solution could be the answer.
At BenefitMall, we are experts in all things payroll. Not only can we assist you through full-service payroll processing and benefits management, we can also help you determine how to classify each of your workers based on federal guidelines. Then we can process payroll for all those workers classified as genuine employees.
It's great to know that America's freelancers are earning more money by providing mission-critical services to their clients. At the same time, increasing wages for independent contractors is likely to raise Uncle Sam's eyebrows. Do everything you can to make sure your company is in compliance with federal classification rules and tax reporting. If we can help, we would be more than happy to do so.
Bloomberg – https://goo.gl/Znzt6e