Let’s continue the conversation about independent contractors and employees. Last time we discussed what the IRS says about properly classifying employees and independent contractors. It’s important to understand the difference between an employee and an independent contractor to avoid any legal implications as a result of misclassification. We need to know the IRS’s rules, but it’s also important to understand how state laws impact worker classification. If you run a business and hire somebody to work for your business, you must properly classify them.
“Well, what happens if I don’t?”
If you misclassify an employee as an independent contractor, you could be liable to the IRS for employment taxes. But that’s not all. You can also be liable under state labor laws regarding minimum wage or meal and rest breaks. You could also be liable under federal labor laws such as the Fair Labor Standards Act. As if that’s not concerning enough, you also risk being liable for things you didn’t anticipate such as worker compensation claims or liability for your employee’s actions under the legal doctrine of respondeat superior. You see why it’s so important to classify them correctly? Proper classification can save you a headache and legal liability in the long run.
The Types Of Test For Classification:
Generally speaking, there are two different types of tests used to determine if a worker is an independent contractor or employee. There’s the Common Law test and the ABC test. The IRS uses the Common Law test, which looks at the behavioral control, financial control, and the relationships of the parties. The ABC test uses three factors, which are in some ways very similar to the common law test.
The three things the ABC test focuses on are:
- If there’s an absence of control
- Or services provided by the worker are related to the services provided by the company
- Also if the worker is customarily engaged in an independent trade or business.
Each state has its own laws on worker classification and the distinction between an independent contractor or employee.
Tune in to this week’s episode of All Up In Yo’ Business to learn how the states classify the distinction. And be sure to subscribe to our YouTube channel for more All Up In Yo’ Business!
Want more information to help with your business? Check out: What is a Registered Agent?