If there is one thing that consistently gets small business owners in trouble with state authorities it’s their classification of whether an individual is an employee or independent contractor. They reason that someone who works with them part time or not at their location can be classified as an independent contractor.
Jamie Lizotte on Classifying Employees and Contractors
On the Small Business Radio Show this week, Jaime Lizotte, Brand Manager at efile4Biz discusses how this analysis is inaccurate and if they are wrong, it can end up costing the small business owner a lot of money. When violations are reported by independent contractors, businesses could be required to pay back wages, taxes and insurance premiums retroactively for years.
According to Jamie, this is such a big issue for small business owners because there is a long list of government agencies at state and federal agencies that are interested in getting the classification right. The IRS and each state’s Department of Revenue want to maximize their tax revenues on employee withholdings. Other federal and state agencies also monitor this to protect employee’s rights and safety. What makes it more difficult, Jamie says is that each state has its own rules.
Small businesses increasingly want to classify people as independent contractors to save money, but they need to pass classification test. According to Jamie, the rules can be can be complex and often contradicting. If you hire an independent contractor, the process should include:
- A contract for the work
- A bill paid through accounts payable
- Collecting W-9 for an EIN number of their company
- They should have other clients
- Sending a 1099-NEC at the end of the year from what was paid
- Not training them or monitoring their performance daily
- There work is not core to the business
Jamie reminds small business owners that people now working from home does not affect their employment status.
Listen to everything you need to know on the Small Business Radio Show.
Image: jaime lizotte