Worker classification can seem straightforward when you have a signed contractor agreement, a W-9, and an invoice. But those documents do not decide whether someone is an independent contractor. In this episode, you’ll learn what to look at in the actual working relationship and why getting the classification wrong can create serious problems for your business.
Worker classification: Why the label isn’t enough
You cannot make someone an independent contractor simply by calling them one. The actual circumstances of the working relationship matter.
Start by asking who controls how the work is done. Does the worker set their own schedule, use their own tools, and work for other clients? Are they operating their own business and offering services to the public? Are they paid for a specific project, or on a regular basis?
These questions can help you understand the relationship. A W-9, contractor agreement, or 1099 may be part of your records, but none of them automatically establishes that a worker is a contractor.
When a classification problem comes to light
A worker’s classification may be questioned after an unemployment claim, an injury, a payroll review, or a notice from a tax agency. You may then have to review past payments and determine whether payroll taxes should have been withheld.
In one case Candy described, a gym had instructors who could choose their classes and schedules, arrange personal training, and work at another gym. After a worker filed for unemployment, the state reviewed the arrangement and determined the workers should have been treated as employees.
The client faced three years of back taxes. After the state reported the issue to the IRS, the total amount due exceeded $25,000. The business could not afford to pay and had to close.
A signed agreement and completed tax forms can make your records look orderly, but the day-to-day relationship is what needs a closer look.
What to review before paying a worker
Before you pay someone as a contractor, consider how the work is actually performed. If you control how, when, and where the person works, or if they work primarily for you without operating their own business, take a closer look at the classification.
Not everyone you pay outside payroll is an employee. Businesses can work with legitimate independent contractors. The key is whether the worker’s circumstances meet the requirements that apply to your situation. Those requirements can vary by law or agency, so get advice from a qualified professional if you are unsure.
If you discover that someone you have treated as a contractor may be an employee, do not ignore it. Get help determining what needs to be corrected. The longer a classification problem continues, the more complicated it can become.
Watch the full episode
Worker classification is a decision worth reviewing before a problem surfaces. Watch the full episode to hear Candy’s example and her guidance on evaluating the working relationship before you decide how to pay someone.
