Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
Over time, however, the lines can blur between employee and contractor, causing challenges with state and federal tax authorities. Employment classification is one of several areas receiving greater scrutiny by these agencies, so the agreements with your workforce should be reviewed for the coming year.
State or federal authorities may discover misclassification issues during a random withholding tax audit or audit of unemployment insurance. The consequences can be severe, including assessments of unpaid unemployment, backup withholding and associated penalties and interest.
Each state and the IRS provide guidelines for classifying employees (direct hire) and contract-for-hire or freelance workers. These guidelines are based on three main criteria when determining the right classification: behavioral control, financial control and relationship to the business.
Behavioral control relates to the business owner’s ability to dictate how, when and where work is performed. For example, if a worker is expected to be at the employer’s primary place of business from 9 a.m. to 5 p.m., Monday through Friday, it would satisfy the behavioral criteria for employment. Contracted workers are not necessarily subject to specific hours in the day or a certain place to perform their work.
Financial control can relate to a concentration of work (compensation) from one specific employer. For example, if a worker is dependent financially on one source of income, without other sources, a concentration may exist and be evidence of financial control. On the other hand, if a worker spends six months on a project, but is working for other companies simultaneously, financial control may not be evident.
Finally, the relationship of the employer and worker can also support classification. If the worker has a contract that outlines the nature of the work, a beginning and end date and rate of pay – and if the worker has the potential to make a profit or have a loss – the relationship can be argued as contractual.
One of the main things that distinguishes a contractor is that this person is dictating much of the employment situation – the hours worked and place of work, the fee or rate and the start and end date. The nature of the work is outlined in a contract.
Without a written and signed contract that specifies the behavioral, financial and relationship criteria, classification can be left to interpretation by the auditing team or regulatory agency.
If you plan to retain a contractor or consultant for several months or even a year, the beginning and ending dates should be outlined in the contract. At the end of that time period, the contract should stipulate renewal for an additional amount of time.
If there are benefits aside from a fee, employers should be careful to state those benefits clearly in a contract. For example, sales professionals may be deemed misclassified if they are on a subcontractor’s commission, but receive bonuses or health benefits like an employee while working for a company.
Keep in mind that Minnesota has special methods for categorizing contractors and employees in industries such as construction. Make sure that your contracts and records satisfy both state and federal requirements.
Auditors will review the documentation of workers to make sure that employers are properly classifying and reporting them. Items to keep in mind for employees include signed W-4 forms, Social Security numbers, signed employee contracts and agreements, documentation for reviews and raises, and wage and benefit summaries.
Contractors should sign an I-9 form and review and sign a contract that outlines the role, relationship and responsibilities of the work. The employer should document the nature of engagements or projects as well as the rate and frequency of pay.
By January 31 of each year, employers must provide contractors with a 1099 form for annual pay of $600 or more. This information must be reported to the IRS.
Regardless of who draws up a contract, the employer is ultimately responsible for any misclassification. Even if the contractor paid taxes on the income, the employer may still be responsible for backup withholding, unemployment and other amounts. Depending on the amount paid to misclassified workers in a given year, assessments and penalties can approach tens of thousands of dollars.
Talk to your certified public accountant about the documentation and classifications of your workers to ensure compliance and proper reporting. If you have been contacted for a random audit, seek consultation prior to the audit to know your rights and responsibilities.
