Is Your Workforce Properly Classified? How to Avoid Penalties
Correctly classifying workers is crucial to avoid legal and financial pitfalls.
Properly classifying those who do work for you is perhaps one of the most important decisions you can make as a business owner.
In an effort to save money and headaches, you may be tempted to hire someone as an independent contractor. Is your relationship with them really that of an independent contractor? It’s a great alternative for an employee. After all, you aren’t responsible for filing taxes or providing benefits to independent contractors.
Ironically, those who are trying to save money and headaches seem to get themselves into trouble and end up losing more money. Misclassification of your labor force as independent contractors when they are actually employees can lead to owing additional wages, benefits, taxes, and unemployment contributions for those workers. It can also create severe and costly penalties, including:
The seriousness is real, yet the US Department of Labor estimates 30 percent of companies nationwide misclassify their employees. The above content was taken from the pamphlet titled Are you OFF THE BOOKS? provided by the Missouri Division of Employment Security.
Independent contractors and employees are not the same. Knowing the distinction will help you determine what your first move when hiring will be, or if you are compliant with your current hiring practices including the benefits being provided. It will also determine your liability to pay and withhold Federal Income tax, social security and Medicare taxes, and Federal unemployment tax, and workers’ compensation to avoid costly legal consequences.
Ultimately, rules hold that workers’ status as an employee or independent contractor hinges on your right to control the worker. If your worker performs services for wages and you can control what, when, and how it will be done, then consider them an employee. Here are some potential differences between an employee and an independent contractor:
An employee:
An Independent Contractor:
Missouri uses the Classifying Employees for Unemployment Tax Purposes – Information for Employers (PDF) which can be found on the Missouri Department of Labor website. This resource will help you determine the legal status of classification.
At our law firm, we are here to assist business owners with the review and preparation of their agreements and setting up the proper legal structure for their businesses.
Please call our office at (888) 887-4170 if you have any questions about this article.
Correctly classifying workers is crucial to avoid legal and financial pitfalls.
