Both large and small businesses across the country utilize independent contractors or freelancers. As these workers fuel today’s gig economy, understanding the difference between a company employee and an independent contractor is important for an organization’s tax purposes. Insurance Journal recently shared that government agencies are auditing companies to see if they are classifying their workers as independent contractors instead of workers to avoid paying workers’ comp, unemployment taxes, social security and Medicare.

1. Classifying Independent
Contractors vs. Employees
Both large and small businesses across the country utilize independent contractors or
freelancers. As these workers fuel today’s gig economy, understanding the difference
between a company employee and an independent contractor is important for an
organization’s tax purposes. Insurance Journal recently shared that government
agencies are auditing companies to see if they are classifying their workers as
independent contractors instead of workers to avoid paying workers’ comp,
unemployment taxes, social security and Medicare.
Ride-sharing companies in particular recently have been sued by employment groups
to receive clarification on the how their workers are classified. The current structure
of these companies has drivers considered as independent contractors. However, this
determination could be changing, because in April 2018, the California Supreme
Court gave a broad definition of employees to these types of gig economy
employers.

2. The ruling stated that to list workers as independent contractors, businesses have to
show they don’t control or direct the work and that the duties fall outside what the
company normally does.
Employee vs. Independent Contractor
Most gig economy workers are considered independent contractors and not
employees. Independent contractors are paid only for the services that they provide
to the company. They do not receive benefits, insurance options, a retirement plan
and payroll taxes are not taken out of their checks. To be classified as an employee, a
company would have to provide workers’ compensation insurance, unemployment
and health insurance as well as social security and Medicare benefits.
IRS Classification Determination
Employees and independent contractors are taxed differently by the IRS.
Independent contractors are not taxed a payroll tax at the time of payment.
Companies must look at the IRS classification rules and decide which, if not all, apply
to their workers to determine if they are freelancers or employees. Employers need
to look at the entire relationship with their worker from beginning to end and make
sure to keep documentation of their determination. The rules are based on three
factors:

3. • Control: The main factor in classifying a worker as an independent worker versus an
employee is the amount of control the employer has over the worker. The more
control the employer has over the worker; the more likely they would be considered
an employee. Employees usually work on-site with set schedules with specific training
for their positions, and their work is crucial to the business.
• Financial: A worker whose employer provides them with tools or supplies and
controls other aspects of their business practices would be considered an employee
rather than a freelance contractor. Independent contractors are paid hourly or per
project, are free to set their own schedule and their work is not the core of the
business.
• Relationship: A worker with a written contract with benefits or exclusivity
requirements would more than likely be considered an employee and not an
independent contractor. Also, the longer the relationship between the small business
and the worker, the more it could be considered an employer-employee relationship.
The Department of Labor has also shared their own misclassification fact sheet for
further clarification and some states, such as California and New York, have their own
enhanced classification factors.

4. Consequences of Misclassifying Employee as Independent Contractor
There are consequences of misclassifying and employee as an independent contractor.
In many cases, employers misclassify their employees as independent contractors so
they don’t have to pay taxes or provide benefits. It isn’t just large corporations having
this issue, either, as small businesses who do not know the differences could do this as
well. If there are red flags about a worker’s paperwork, the IRS could investigate a
company further.
The IRS looks at the entire relationship between the employee and employer when
making their determination if a worker has been misclassified. The IRS also states that
if a business classifies an employee as an independent contractor and there is no
reasoning behind doing so, the employer may be held liable for employment taxes for
that worker. However, if it’s determined the individual is an independent contractor; a
company will not have to pay employment taxes or other benefits.
Companies must file the correct employee or independent contractor paperwork with
the IRS. If a worker is misclassified and the employer doesn’t correctly withhold or pay
the required employment taxes, or withhold social security or Medicare amounts, the
IRS could audit the business and go after the money that they are owed as well as give
additional penalties or fines for the mistake.

5. Small Business Insurance at AmTrust
Small business owners need to consider a variety of small business insurance
solutions for their classified employees. AmTrust Financial is a multinational
property and casualty insurer specializing in coverage for small businesses. To
learn more about our small business solutions, please contact us today.
Article Source:- https://amtrustfinancial.com/blog/small-business/classifying-
independent-contractors-vs-employees