As many companies have expanded their workforces to include out-of-state employees and others working from remote locations, it’s tempting for some employers to consider those employees independent contractors instead of full-time employees. After all, keeping a worker off the payroll may potentially save an employer money on payroll taxes, benefits and other labor costs.
However, as we have seen recently in the state of Georgia, labor authorities are taking a closer look at these arrangements and requiring that more workers be counted as full employees. A remote worker doesn’t necessarily qualify as an independent contractor just because they work outside company offices or even in another state. Generally, employers must withhold and pay income taxes, Social Security taxes and Medicare taxes, as well as pay unemployment tax on wages paid to an employee. These requirements don’t apply to independent contractors.
According to the IRS, it is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors. Tests for determining who is an independent contractor and who is an employee vary from state to state, but the IRS suggests what it calls ‘Common Law Rules.’
Factors that determine worker independence
According to the IRS, facts that provide evidence of the degree of control and independence of a worker fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer (how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)?
- Type of Relationship: Are there written contracts or employee-type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue, and is the work performed a key aspect of the business?
Legal experts caution that a failure to classify a worker correctly can result in penalties for noncompliance. For example, businesses may incur penalties if they are not registered with the state unemployment offices and paying premiums for state unemployment insurance where remote employees are located.