CHARLOTTE – The wrong classification of workers can cause financial consequences to any business owner and is one of the most important parts of payroll to understand. If you classify workers as contractors and the IRS later decides they are employees, you can be liable for unpaid payroll taxes, fines, penalties, and interest fees.
Many companies and new employers may think that they can classify all or some workers as independent contractors to save money on payroll or not run payroll altogether. This is not a good idea. There are rules that must be met before paying workers as independent contractors(1099). And more likely than not, they are employees.
What is important is how the IRS and your state classify workers, which is unique to each situation and considers many different rules. The most important are whether you (the employer) have the right to control what work will be done, how it will be done, and where it will be done. Other items include whether you provide tools, equipment, workspace, insurance, vacation, pension pay, sick leave, etc.
Example: Pam is a salesperson employed on a full-time basis by Tom’s Car Sales, an auto dealer. She works 6 days a week, and is on duty in Tom’s showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager’s approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Tom. Tom also pays the cost of health insurance and group-term life insurance for Pam. Pam is an employee of Tom’s Car Sales.
Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
Jen Stevenson Payroll is a member of American Payroll Association, Union County Chamber of Commerce, and the Waxhaw Business Association. Please feel free to reach out to me @ JenStevensonPayroll@outlook.com.