Independent Contractor or Employee?
Often, it’s not just a Form 1099 that makes the distinction. For many businesses, they’ve had independent contractors for years and have used IRS definitions as the determining factor to later be surprised by the Department of Labor or their workers’ compensation carrier…usually having to face either fines or additional insurance premiums. While it can seem like a confusing maze to make the proper determination, there are best practices to protect your organization. As a general rule, the more control you the employer have over the individual, the more likely it is they’re an employee.
In addition to the IRS and Federal requirements, pay very close attention to your individual State requirements. For example, New Hampshire has 12 specific criteria that ALL must be met in order to establish someone as an independent contractor. Vermont has a similar “right to control” test and an additional “nature of the business” test. With the “nature of the business” test, even if you can establish someone as an independent contractor, if that person is performing work that could be carried out by an employee in your normal course of business, and the activities being performed are an integral part of your regular business, you are responsible for workers’ compensation insurance. This often comes as an extremely unpleasant premium due for employers who legitimately have an independent contractor. For example if you’re a carpenter and won a bid on a large job while you were finishing another job and decided to subcontract a part of either of them to another carpenter, you would still be required to provide workers’ compensation coverage in Vermont.
Finally, there is currently an emphasis by the IRS on ensuring employees and independent contractors are properly categorized. We have already seen the improper classification results, and it is not simply limited to contractors and construction companies.
Overall, the best practice is to proceed very cautiously with independent contractors and always be certain your tax professional is aware of the classifications as well as ensuring you are in compliance with your workers’ compensation carrier, state unemployment board, and department of labor.
If you have questions on this topic, or anything else compliance related, please contact our office at 877-352-2121.