Classifying an individual working for your team into the correct employment category is extremely important to your organization’s success. The main consequences of incorrect employee classification may come in the form of governmental fines, which can be costly in time, money and energy, taking away your focus on main business goals. Economic experts estimate that there are millions of employees categorized incorrectly nationwide, for various reasons.
Full-time employment (W2) and independent contractor (1099) are some of the most common forms of employment classification. Choosing between these groups needs to be a strategic decision based on your current business needs, short/medium/long term objectives and budget. Nonetheless, it is not an easy task to accomplish, given their similarities and the complex set of rules set into place by the IRS (and other government entities) to define each category. Read-on for more details about the differences between them and hopefully avoid financial penalties, regarding employee vs contractor classification.
The level and origin of instructions is one of the ways that the IRS uses to identify and separate employees from contractors. If the company directs the individual to where, when, and how the work needs to be done, in most cases, that would indicate that the person is an employee. This line of thought also extends to other activities besides direct work responsibilities, such as the origin of the training that the individual received. If a person requires company training, it is an indication that they are an employee. People whose services are integrated into business operations or significantly affect business success are likely to be considered employees.
Contractors typically focus on more peripheral parts of the operation. Most businesses (especially larger ones) are hierarchical in nature, therefore, some individuals in the middle or upper management positions have others working below them. If those individuals hire, supervise and pay the employees from the company’s budget, that person is usually considered an employee. If the same person is hiring and paying a group of individuals to perform a specific job, out of his own funds, that person is more likely to be identified as a contractor. People whose hours or days of work are controlled directly by the organization (where the work is being done) will most likely be considered full-time employees, while the ones choosing their own schedule will be classified as contractors. When a company provides an employee with the necessary equipment, tools, materials, etc., to perform a job, this individuals are also considered employees, since contractors usually already have all the means and expertise to perform a specific task.
Lastly, people who provide services for multiple companies at the same time, are typically identified as contractors, while individuals who work specifically at one company are generally considered employees. Reference the full 20-factor test from the IRS if you need to decide whether you should classify someone as an employee or a contractor.
Fortunately, using staffing services can help you streamline your recruitment process by allowing you to test candidates for a period of time, before bringing them in as full-time employees, and also avoiding misclassifications. Reach out to Sincerus Solutions (staffing services) and see how we can create value for you by partnering with us.