In these tough economic times many companies regardless of their size are doing whatever they can to save money and keep their business afloat. After my years of experience working as a Compliance Audit Investigator with the State of Nevada Employment Security Division, employers often find the best way to save on their employment expenses is to classify its employees as independent contractors rather than as employees. That way instead of being responsible for the many taxes and expenses that are associated with having employees, like matching Federal Income Tax, Social Security and Medicare Tax, or paying FUTA (Federal Unemployment) and SUTA (State Unemployment), employers simply pay individuals for their services as independent contractors and let the individual pay their own taxes. Then at the end of the year the employer issues a 1099 to the individual avoiding all these taxes and expenses.
However there are very strict Federal and State guidelines that govern whether an individual is an employee or an independent contractor, and improperly categorizing your companies employees as independent contractors can cost your business tens of thousands of dollars.
I have seen employers try to claim their company’s receptionist or administrative assistant is an independent contractor and not an employee subject to employer employment tax obligations. There was even a property owner who claimed his building superintendent was an independent contractor. In all these cases the government disagreed.
Now of course every situation is different, but unless your employer relationship with an individual meets all of the following basic criteria established for an independent contractor listed below, that individual you see every day is likely an employee of your company.
1. Direction and Control: Is the individual under your direct supervision or can they come and go as they please? (i.e. Does the individual have set hours where they need to be at your place of business every day, or do you tell them when and where they need to be on a daily basis?)
2. Providing Similar Services to Others: Is the individual providing similar or related services to other companies? (i.e. Does your cleaning person provide cleaning services to many other companies, or are they at your office every day at a set time providing whatever cleaning services are needed only for your company?)
3. Established as a Separate Company or Business: Is the individual operating under a company name or as a sole proprietor? (i.e. Brenda can be operating as Brenda’s Cleaning Services, Inc. or as Brenda Richards individually and still be established as her own company as long as she meets the requirements in 1 & 2 above.)
If you have any questions as to whether individuals may or may not meet these guidelines, contact your local IRS office, or better yet give us a call or send us an e-mail with your questions and we will be glad to help.
