Have You Ever Been Nailed by Fine Print You THOUGHT You Understood?

Fine print has caught me off-guard a few times. Take this detail-oriented question, for example:

When does a contractor become an employee?

You may think you know the answer. But the law frequently looks at things like this differently than we do as CPAs, insurance brokers, and business owners in general.

This is especially important from a workers' compensation standpoint—because that's where state law most commonly stands between employers, employees, and yes—contractors.

Unfortunately, the question about employees and contractors doesn’t have a simple answer. It depends on a long set of factors, determined by a judge.

We have to wrestle with this question because if we get it wrong, it can hurt. Sometimes CPAs tell employers to pay contractors “as if they’re contractors,” even though by legal definition they’re actually employees.?

This means contractors have a different tax structure and are legally entitled to certain benefits. Other times, business owners accidentally treat contractors like employees and lose money unnecessarily.

Doubly unfortunate—an additional layer of complexity is at play. Sometimes a person has one status for tax purposes, but a different status for insurance purposes. So, you can have a person who functions like a contractor tax-wise, but as far as insurance is concerned, they're an employee.

I know this muddies the water, but the distinction is important. Don’t shoot the messenger.

Sometimes, business owners get crushed by their state Workers Comp board because they received incorrect advice from a CPA, insurance broker, or both. Or, they get the wrong information about an insurance premium or deductible - so they end up paying more than they need to. In other cases, they might unwittingly pay less than they should, and pay a steeper price in penalties.

Okay, I see this is hard and complicated ... so how do I figure it out?

I wish I could hand you a one-page handbook for classifying your employees or advising your tax clients. It's not that simple, unfortunately, especially when it involves state law. Plus, the answer changes wildly depending on your geography.

For example, the New York State Workers Compensation Board has a 300-page manual called their “Employee Handbook.” This handbook contains 10 factors a judge will consider when determining whether someone is truly an employee or a contractor.?

Yes, a judge. This means that many of these decisions involve courtrooms, a place few employers or CPAs want to end up. This is hardly?black-and-white, or simple to figure out. But few people put in the work to make the right decision, until it’s too late.

Instead, they sit at the mercy of a judge to subjectively interpret their case from this 10-factor list. You can only hope your hearing takes place on a day when the judge is in a good mood, and working on a full stomach.?

So, let’s get down to brass tax… I mean, “tacks.”

Depending on your occupation, you should do a couple of different things.

1. If you’re an employer, check with your state law (before it’s too late) about the distinctions between employees and contractors. You don’t need to become a law expert overnight, but you should invest time and energy to understand this up front. It’s up to you to correctly classify your employees—or? it could cost you dearly. Remember - definitions can change depending on whether you deal with taxes or insurance. Work with CPAs and insurance brokers who can help you with these questions.
2. If you’re a CPA, make sure you understand the differences for your state. If you don’t, you could get your clients into some deep trouble. For example, if you advise someone to pay employees like they’re contractors, and they fill out their Schedule C accordingly, you can expose them to legal liability. Make sure everything’s above-board for them.
3. Regardless of background, we all have “questions we don’t realize we have.” We need to ask them from a place of curiosity and humility. We can always learn more. We can always discover things we didn’t previously understand, that could negatively impact us if we neglect them. We all have opportunities just beyond the limits of our awareness ... and we’ll only discover them by remaining teachable and expanding our networks.

Speaking of expanding - I’m building a network of CPAs, insurance brokers, mortgage lenders, and other professional services to work together and take our services to the next level.

If you’re proactive and truly care about your customers, you deserve someone in your network who can play well on your team and make things smooth for your clients.

Let’s talk. Send me a direct message here on LinkedIn.