Mack's Busy Biz

In this down economy, it’s more important than ever to control your business costs.  You may be cutting too much, however, if, in an attempt to lower your labor costs, you classify all your new-hires as “independent contractors.”

 What is the difference between an employee and an independent contractor?

 An employee is on your payroll, you report his wages periodically, and contribute to his taxes.  You may offer him benefits like health insurance, paid vacation, and a retirement plan.  An independent contractor will typically get none of that.  He works for you and you pay him, but is responsible for his own taxes and benefits.  

 So in these times, why wouldn’t a business owner classify everyone as an independent contractor?

 Well, because it’s illegal.  There are several factors the IRS and the states use to determine the status of your workers. 

If your workers are on your schedule, and their actions are controlled by you, and they work at your direction, then it’s a pretty safe bet that they’re employees.  You must report their wages to the IRS and your state.  

That’s a typical work scenario, but there are countless other situations where a business owner may have an employer/employee relationship with a worker.

 According to the IRS (www.irs.gov), answering these questions are helpful in determining whether your worker is an independent contractor (but they are not definitive):

1.  Behavioral:  Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

 Don’t assume that if your workers qualify for federal contractor status, that they come under the State’s definition as well.  For example, Pennsylvania law states that workers are labeled employees unless they are actually and formally in business for themselves.  The status requires evidence of self-employment, like a business license, incorporation, stationery, preprinted invoices and the like.  Depending on your situation, this still may not be enough to take your worker out of “employee” status. 

 The lesson here is to check the rules of your state and the IRS, and give your lawyer or accountant a call if you’re not sure.

 Another reason to keep employees on your payroll is because it’s good business.  Constant turnover makes for a difficult operation and lowered customer service.  Having a happy staff is priceless, no doubt.  Especially in these times your employees need, assuming you can provide it, assurance that their jobs will be there tomorrow and not outsourced to contractors or Mexico. 

 Your customers appreciate a business that takes care of its employees.  No doubt, these times are hard and belt tightening may require thinning out your staff, reducing their hours, or curbing their benefits.  However, avoid cutting so hard that you hurt your business in the long run, and God willing, it’ll be there for you when times are better.