Most businesses operate with a mix of both employees and independent contractors. While this is an acceptable business practice, it is vital that the organizations properly categorize these employees to avoid penalties from both state and federal government. Employing independent contractors has many benefits including the freedom from withholding taxes, providing benefits and termination of employment. What can be devastating to a business is misclassification which can result in severe penalties from both the IRS and state governments.

In recent years, both state and federal agencies have begun focusing on employee classification. To protect their businesses, employers need to understand what defines an independent contractor. Fortunately, there is a relatively simple rule to follow; just know your ABCs.

A. Such individual has been and will continue to be free from control and direction in connection with the performance of such services, both under his contract for the performance of service and in fact.

AND
B. Such service is performed either outside the usual course of the business for which the service is performed or is performed outside of all the places of business of the enterprise for which the service is performed.

AND
C. Such individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed. (Adapted from the IRS test factor)

For a person to be an independent contractor, all three rules must apply. While these rules seem simple, the IRS reports that roughly 30% of employers are misclassifying their employees. The penalties for failure to properly classify employees can receive retroactive penalties requiring payments to Social Security, FUTA, Workers Compensation, IRS, State Unemployment taxes, along with other employee benefits such as pensions and health benefits.

To avoid incurring these penalties businesses should be realistic when applying the ABC test. If your organization has questions regarding Independent contractors, please contact Corporate Cost Control at 800.207.6926


Contact CCC to see how we can save your organization time and money.
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