Under IRS and Department of Labor (DOL) guidelines:
- The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.
- Someone is not an independent contractor if they perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if a “contractor” is given freedom of action.
- DOL will look to see if the independent contractor exercises “behavioral control” and “relationship of the parties” as to employees. Examples: training, leading, evaluating, hiring, firing, etc.
- In general, independent contractors are not supposed to oversee company employees.
If the IRS or DOL decide that someone is not an independent contractor, they have the right to “reclassify” that person as an employee. If that happens, the entire compensation paid for the prior 3 years will be treated as wages.
If that happens, here are the penalties to consider:
- 20% – 40% of all contract payments and compensation, plus up to 100% of what should have been the FICA contributions for both employee and employer
- Up to $1,000 in criminal penalties per misclassified employee, per year
iii. Up to 1 year in prison, per year of violation
The use of independent contractors is still a good idea, but be certain to follow the rules.
From all of us at Main Street Development and Addis Law offices, we wish you a Prosperous 2020.