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$150,000: The Difference between an Employee and an Independent Contractor

Lucere Legal helps small business owners with independent contractor classification

The IRS and many state governments have stepped up their enforcement action against the misclassification of employees as independent contractors by business owners. One friend of ours was recently fined $150,000 for Worker’s Comp Fraud stemming from the unintentional misclassification of employees as independent contractors.  It is of great importance that you keep these guidelines in mind and know the difference when it comes to your hiring practices.

The following are the three general characteristics that can be used in determining the status of employment:

Behavioral control – Whether a business directs or has direct control over how the work is done, either through providing  explicit instruction, training or by other means of controlling how a person performs work.

Financial control – Whether a business directs or has control over the financial and business aspects of a worker’s job.

Relationship type – The working relationship between a worker and the business owner (and how each perceives it).

The Small Business Administration classifies an employee as someone who:

  • Has specific, employer-dictated duties
  • Is performing work that is controlled by the employer
  • Has been trained into the work being performed at the behest of the employer
  • Works only for one employer

A worker that can be classified as an independent contractor will be one that:

  • Operates under a separate business name
  • Invoices for his or her work
  • Has his or her own equipment
  • Determines his or her own hours
  • Maintains separate business records and financial accounts
  • Has his or her own employees
  • Performs work that is temporary
  • Has a written contract

Employers face stiff financial penalties for misclassification of workers, including fines, interest and penalties. Even harsher penalties can follow, should the misclassification be determined to be willful.

To learn more about this, check our our Hiring & Firing page, and be sure to download our Guide to Independent Contractors.

To have us take a look at your employment practices, call us today at (612) 206-3701 or fill out our contact form to schedule a small business consultation session.

Image courtesy of bplanet/freedigitalphotos.net

Contact us to see how we can help you with Independent Contractors

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