Employers can get sizable tax benefits by paying independent contractors. But they can get in big trouble if they misclassify those who should really be considered employees. Here are some common pitfalls to look out for.
At the end of last year, FedEx got stuck with a $319 million penalty for misclassifying 7,000 drivers as independent contractors. (That’s just for 2002 – more fines may be coming.) FedEx claims the drivers are independent because they own the their own trucks, but the IRS found that the company exerted enough control over their hours and routes to make them employees. (The ruling’s being appealed; we’ll keep you posted.)
So what’s the difference between employee and independent contractor? Here are some keys:
- Control: Generally, with a contractor, employers can control only the result of the work, not how and when the work is done, like they do with employees
- Payment: If businesses expenses are reimbursed, you’ve most likely got an employee. Independent contractors generally risk making a profit or a loss on their work. Also, employees are normally paid based a period of time (hourly wage or weekly salary) whereas contractors usually get a flat rate for completing a project.
- Permanency: If someone’s hired for one project or a specified period of time, he or she is likely a contractor. If the job offer appears to be indefinite, that may indicate an employer-employee relationship.
Those are the rules from the IRS. Some states have different tests and ways to determine employee/contractor status, so make sure you check those, too.
Read more from the IRS here.
