30% of Businesses Misclassify Employees - Do You?

​A Department of Labor study found that up to 30% of businesses misclassified employees as independent contractors. 

Should you be hiring employees or independent contractors? There’s no one size fits all answer, it depends on how you want to accomplish your goals. 

The main importance behind employee classification regulations is their effect on taxes, payroll items like overtime and deductions, and eligibility for benefits, such as health insurance and paid time off. Classifying employees can be complex and if not done properly, can be very costly and time-consuming for businesses. 

The Department of Labor (DOL) is the governmental agency that handles misclassification of employees (among many other things, of course). You can find out more about misclassification directly from the DOL here. 

                                                                                          ...Click the link below to read more

​In 2015, misclassifying around 600 employees cost National                 Consolidated Couriers Inc. $5 million  - that’s nearly $8,000 per employee! ​

Some of the more common costs involved in misclassifying employees include employer fines and penalties, back wages up to 3 years, the total of any unpaid taxes and even the reinstatement of a previously terminated employee.

So what’s the difference between Employees and Independent Contractors?

First, taxes -
Generally, you are required to withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. These are often called W2’d employees.

You do not generally have to withhold or pay any taxes on payments to independent contractors. These are often called 1099 employees.

Second, responsibilities -
The IRS states that a person is generally only considered an independent contractor if they fit the following 3 categories:

• Behavioral: The company does not have control or the right to control what the worker does or how they do their job.
• Financial: The company does not control the financial aspects of the worker’s job, such as how the worker is paid, whether expenses are reimbursed, who provides work materials, etc.
• Relationship: The company doesn’t have written contracts describing the business relationship between both parties, does not provide the worker with employee benefits, etc.

Here’s a quick comparison of the basics,

Many businesses shy away from hiring independent contractors but properly classified contractors can be a great asset to small businesses. They are generally experts in their field, have greater flexibility and you will likely save money by hiring an independent contractor since you don’t have to pay additional payroll taxes or offer benefits.

Employees on the other hand, are usually a better fit if your business requires more day-to-day supervision and monitoring over processes and results or need staff that can be flexible in handling other roles throughout the business.

Business owners should pay close attention to how workers are classified - no matter how many employees or contractors you hire. We recommend reviewing your job descriptions and classifications quarterly to make sure they are up to date and to reduce your risks of misclassification complaints. 

C Squared has a wealth of experience with the Department of Labor. In addition to many internal audits for small businesses, Christopher Ray has previously worked at the DOL and Chariss Tatman had the delight of managing a comprehensive DOL audit - so if you’re unsure how to classify your employees, are looking to do an internal audit or were recently notified of a DOL audit contact C Squared. ​