| The days when a small business could ignore the risks | | | | - Did the worker invest in the facilities used in |
| of having misclassified workers are over. | | | | performing services? |
| Unfortunately, some employers improperly classify their | | | | - Does the worker makes his or her services available |
| employees as independent contractors to avoid the | | | | to the other businesses? |
| pain associated with having employees, namely: | | | | - How do you pay the worker? |
| - Payroll taxes | | | | - Can the worker can realize a profit or incur a loss? |
| - Minimum wage or overtime requirements | | | | Type of Relationship |
| - Other wage and hour law requirements, like providing | | | | These facts show how the business and the worker |
| meal periods and rest breaks | | | | perceive their relationship. |
| - Reimbursable business expenses employees incur in | | | | - Do you have written contracts describing the |
| performing their jobs | | | | relationship the parties intended to create? |
| Additionally, employers don't have to cover | | | | - Is the worker available to perform services for other, |
| independent contractors under workers’ | | | | similar businesses? |
| compensation insurance, and are not liable for | | | | - Do you provide the worker with employee–type |
| payments under unemployment insurance, disability | | | | benefits, such as insurance, a pension plan, vacation |
| insurance, or social security. | | | | pay, or sick pay? |
| It's true, the expenses associated with employees are | | | | - How permanent is the relationship? |
| high. However, the cost of misclassifying workers is | | | | - Are the services performed by the worker a key |
| even higher. If your contractors are determined to | | | | aspect of your business? |
| really be employees you will not only be required to | | | | You'd think that a written contract detailing that you |
| pay the taxes and fees you should've, you may also | | | | and your worker agree that you are not creating an |
| be required to pay the employee's taxes as well. Not | | | | employer-employee relationship is all that's needed, but |
| to mention the stiff penalties and interest that can be | | | | unfortunately this isn't the case. It may certainly help, |
| imposed by both federal and state agencies for | | | | especially is you subsequently issue a 1099 form |
| violating the various laws. | | | | instead of a W-2 form, but even this doesn't |
| This is no small matter and is on the radar of every | | | | guarantee protection. |
| government agency out there, all of whom are | | | | - If you decide to classify some or all of your workers |
| anxious to find additional revenue sources these | | | | as employees, this is what you have to look forward |
| days. The IRS estimates that one in seven U.S. | | | | to: |
| employers is guilty of misclassifying some of its | | | | - You must withhold income tax and your |
| employees, resulting in a loss of more than $4.1 billion a | | | | employee’s portion of social security and Medicare |
| year in tax revenues. These days the question is no | | | | taxes. |
| longer "if" you'll get audited for employee | | | | - You are also responsible for paying social security, |
| misclassification it's "when". | | | | Medicare, and unemployment (FUTA) taxes on your |
| For businesses facing an audit, the odds favor the IRS. | | | | employees’ wages. |
| A recent report found that 92 percent of the | | | | - You must file a Form W-2, Wage and Tax |
| companies audited for "misclassification" were hit with | | | | Statement, showing the amount of taxes withheld |
| significant penalties and assessed for back taxes. | | | | from your employees’ pay. The Form W-2 is used |
| Between 1988 and 1995, the IRS audited more than | | | | by employers to: |
| 13,000 businesses, reclassified 500,000 of their | | | | - Report wages, tips and other compensation paid to |
| independent contractors as employees, and levied | | | | an employee |
| $830 million in back taxes and penalties. | | | | - To report the employee's income tax and Social |
| Making matters worse, sometimes the various | | | | Security taxes withheld and any advanced earned |
| agencies disagree. For instance, here in California | | | | income credit payments |
| there are several state agencies involved with the | | | | - To report wage information to the employee, the |
| determination of independent contractor status: (1) | | | | Internal Revenue Service and the Social Security |
| the Employment Development Department (EDD), | | | | Administration |
| which is concerned with employment-related taxes, (2) | | | | QuickBooks handles W-2's differently based on which |
| the Division of Labor Standards Enforcement (DLSE), | | | | payroll subscription you've chosen. There are three |
| which is concerned with whether the wage, hour and | | | | options available: |
| workers’ compensation insurance laws apply; (3) | | | | - Basic Payroll: No tax forms, only reports that your |
| the Franchise Tax Board (FTB), which is concerned | | | | accountant can use to prepare them |
| with state income taxes; (4) the Division of | | | | - Enhanced Payroll: Includes all federal and many state |
| Workers’ Compensation (DWC), which is | | | | tax forms, you pay taxes and file forms |
| concerend with worker's compensation; and (5) | | | | - Assisted Payroll: Intuit handles your payroll taxes for |
| sometimes even the Contractors State Licensing | | | | you |
| Board (CSLB), that also have regulations or | | | | If you decide to classify some or all of your workers |
| requirements concerning independent contractors | | | | as independent contractors, there isn't as much |
| and it's not uncommon for one to rule that a worker is | | | | paperwork but there are some reporting requirements: |
| an employee while another rules that the same worker | | | | - You may be required to file Form 1099-MISC, |
| is an independent contractor. | | | | Miscellaneous Income, to report what you have paid to |
| Because the potential liabilities and penalties are so | | | | your independent contractors. The Form 1099-MISC |
| significant if an individual is treated as an independent | | | | is: |
| contractor and later found to be an employee, each | | | | - Used to report payments made in the course of a |
| individual working relationship needs to be thoroughly | | | | trade or business to another person or business who |
| analyzed to make sure every single worker is properly | | | | is not an employee |
| classified. Now is not the time to group classes of | | | | - Required among other things, when payments of $10 |
| employees together. Just because one of your | | | | or more in gross royalties or $600 or more in rents or |
| workers qualifies as an independent contractor, don't | | | | compensation are paid |
| assume that all the others doing similar work will. | | | | - Provided by the payer to the IRS and the person or |
| It all boils down to control - does your business have | | | | business that received the payment. |
| control or the right to control the worker both as to the | | | | You do not have to withhold taxes from your |
| work done and the manner and means in which it is | | | | independent contractors’ pay. They are |
| performed? The IRS breaks control down into three | | | | responsible for paying their own income tax and |
| categories: behavioral control, financial control, and | | | | self-employment tax. |
| relationship of the parties. It is very important to | | | | If setup properly, QuickBooks can help you track all the |
| consider all the facts for every single one of your | | | | information needed for 1099's. Here's how: |
| worker relationships – no single fact provides the | | | | - Turn on 1099 preference |
| answer. | | | | - Edit > Preferences > Tax: 1099 > Company |
| Behavioral Control | | | | Preferences tab, check box next to Do you file |
| These facts show whether there is a right to direct or | | | | 1099-Misc forms and select accounts you use to pay |
| control how the worker does the work. | | | | subcontractors next to Box 7 |
| - Instructions - if your business has the right to direct or | | | | Setup subcontractors as 1099 vendors |
| control the work, even if you don't actually exercise | | | | - Double-click on vendor, select Additional Info tab, |
| the right, it can lead to an employee classification. | | | | check box next to Vendor eligible for 1099 |
| Here are a few examples of what's considered | | | | Manage reporting process |
| control: | | | | - Vendors > Print 1099’s/1096 |
| - how, when, or where to do the work | | | | In the end, how to classify your workers is a business |
| - what tools or equipment to use | | | | decision that only you can make. You may save |
| - what assistants to hire to help with the work | | | | money upfront by classifying them as independent |
| - where to purchase supplies and services | | | | contractors, but you could end up paying much more in |
| Training - if your business provides training about | | | | the long run if they are reclassified. Protect yourself |
| required procedures and methods it may be | | | | as much as possible with a paper trail - contracts, |
| considered an indication that the business wants the | | | | agreements, written answers to the questions listed |
| work done in a certain way, which can lead to an | | | | above. You might even consider requiring your |
| employee classification | | | | independent contractors to prove you with |
| Financial Control | | | | documentation that they are actually operating a small |
| These facts show whether there is a right to direct or | | | | business themselves, such as a business license, Doing |
| control the business part of the work. Here are a few | | | | Business As (DBA) or Tax ID number from the IRS. |
| questions to ask yourself: | | | | If you need additional assistance, please call our |
| - Does the worker has unreimbursed business | | | | QuickBooks technical support line at 888-351-5285. We |
| expenses? | | | | are here to help you get the most out of QuickBooks! |