$150,000 Risk: Know the Difference Between an Employee and an Independent Contractor

The IRS and the state of California have both stepped up their enforcement action against business owners who misclassify employees as independent contractors.

A colleague’s friend, a small California business owner, was recently fined $150,000 for Worker’s Comp Fraud stemming from a misclassification of employees as Independent Contractors.

Knowing this, it is imperative for you to know the difference when it comes to your hiring practices.

In general, these are the three characteristics in determining employment status:

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

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

3. Relationship type – how a worker and the business owner perceive the working relationship.
According to the Small Business Administration, a worker is likely to be classified as an employee if he or she:

  • Has specific duties that are dictated by the employer
  • Is performing work that is controlled by the employer
  • Has received training from the employer for the work being performed
  • 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.  If the misclassification is found to be willful, there can be even harsher penalties.

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