Question

Why do you think some business owners classify people that work with them as contractors when they should actually be classified as employees? What is the difference and why does the government care?

Answer 1

There are certain benefits to employers for recognising people as independent contractors instead of employees. These are:

Unemployment Compensation:

Employee: You must contribute to an unemployment insurance fund in your state and pay a federal unemployment tax. An employee who is laid off or fired for a reason other than serious misconduct is entitled to unemployment benefits from the state fund.

Independent Contractor: Generally, an employer does not make contribution to a state unemployment fund or pay the federal unemployment tax for an independent contractor.

Job Benefits

Employee: An employer usually provides job benefits for an employee, such as pad vacations, sick leave, and holidays, health insurance, and retirement plan.

Independent Contractor: Paid only for time spent working. Responsible for paying for their own health insurance and retirement savings plan.

Workspace

Employee: An employer provides workspace and equipment for an employee

Independent Contractor: Usually - but not always works away from your place of business and provides his or her own equipment

Government Regulations

Employees: of governmental regulations intended to protect employess, including laws dealing with wages and hours, employee benefits, family and medical leave, workplace health and safety, and illegal discrimination.

Independent Contractors: If the worker has been properly classified as such - is subject to fewer legal restrictions. No need to pay for being responsible for monitoring health and safety conditions at an independent contractor's own home, shop, or office.

Liability for Injury to Worker

Employee: responsible for for medical treatment if an employee is hurt on the job and paying money to partially cover employee's lost wages. Require whether or not your company was at fault for the employee's injuries.

Independent Contractor: If injured because of some dangerous situation at your business premises can recover medical bills and lost income from your business, as well as money for pain and suffering. Must show that you were negligent.

Liability for Worker's Actions

Employee: If employee carelessly injures or damages property, employer can be held responsible.

Independent Contractor: Can be held reliable if they act as your agent. Generally not responsible for their negligence

If employer classify a worker as an independent contractor when the worker should have been treated as an employee, employer can be required to pay:

• The employer's and employee's share of Social Security and Medicare contributions.
• Income tax that should have been withheld from the employee's wages.
• Federal unemployment tax
• You can also be liable for the employee's state income taxes that should have been withheld, as well as unemployment compensation taxes.
• If the worker is injured on the job, you may have to pay workers' compensation benefits because you didn't cover the worker under your company's workers' compensation policy.

The government or IRS prefers employee status more as this will result in more tax revenue to government.

Also IRS can take following steps in case of confusion of status:

• IRS may look into the affairs of an independent contractor who hasn't been paying income taxes.
• Disgruntled employees may complain to the IRS if they think independent contractors are getting favored treatment.
• During audits, the IRS routinely checks to see if workers have been misclassified as independent contractors.
• Worker whom you've classified as an independent contractors may files form 8919, asserting that workers who perform similar services for you under similar control are classified as employees.