Are my Workers Employees or Contractors?

 

Employee or contractor?

Determining whether workers should be classified as employees or contractors affects whether many aspects of the Fair Labor Standards Act (FLSA) apply—such as overtime pay. Also, the Internal Revenue Service (IRS) keeps a close eye on employee classifications to make sure employers don’t avoid payroll taxes.

Government figures estimate 25–30% of all employees are misclassified as independent contractors. If the misclassification is discovered, clients will owe up to three years in back wages for any overtime, as well as penalties for insurance and benefits denied under the Affordable Care Act.

What is the difference between employees and contractors?

While the IRS, the FLSA, and common law have all helped define the differences between an employee and an independent contractor, the difference between the two is not totally cut and dry.

The IRS generally assumes an employee relationship, but the line can sometimes be ambiguous. For detailed information on the difference between independent contractors and employees, consult the IRS guidelines.

Employees:

Employees work at a specific time and place set by the employer and generally work for just one company.

The employer provides training, tools, and work-related resources. They are subject to a large degree of control by the employer and are generally paid a salary or hourly wage.

Employees must fill out the following forms which need to be kept in employer records:

1. W-4 form to indicate how much income tax they want withheld from their paychecks

2. I-9 form to prove they’re allowed to work in the US—employers also need to check their passport or other ID on or before the first day of work

Once onboarded, my payroll partner, Gusto can take care of sending a New Hire Report to the state. The state uses the details to keep track of people who owe certain government debts, like child support.

At the years end your company must report all compensation paid to an employee during the tax year using a Form W-2.  

Don't forget about the state and federal unemployment insurance as well as Workers' Comp Insurance. 

Contractors:

Contractors can work whenever, and sometimes wherever, they’d like.

They can pick up contracts for multiple companies and typically provide their own tools and resources. Pay is generally a flat fee or paid on a project basis.

Other than the 1099 forms at the end of the year (Report payments of $600 or more in a calendar year using a Form 1099-NEC) required by the federal government, there may be nothing to report to the government about the contractors you have hired. However, some states do require that a New Hire Report is submitted by the payee (that's your company). If this is the case, I can have my payroll partner, Gusto submit it on your company's behalf.  

You must request a W-9 from each contractor and keep it in your records.

As your bookkeeper, should you decide to have I'm the Bookkeeper handle your payroll for you as a stand alone service, you should feel confident to know that I have partnered with Gusto Payroll.  

US News has rated Gusto a 4.3 in their Best Payroll Software of 2022 list and report that "more than 100,000 businesses across the country use Gusto to run payroll and administer benefits". 

Yes, with Gusto we can offer your employees benefits, with the current state of the country and difficulty retaining good employees - this is a valuable resource! 

If you would rather administer your own payroll and are currently shopping or considering a change, I recommend Gusto. Check it out and sign up using my link if you want to manage your own payroll account and you'll automatically be added to my client list. 

https://gusto.com:/partners/invite/i-m-the-bookkeeper-7756161242744851

Even if you decide not to retain my services for your payroll, I still recommend Gusto, and if you sign up using THIS DIFFERENT LINK and run your first paid payroll, you’ll receive a $100 Visa gift card! 

 https://gusto.com/r/victoria0ab2