Independent Contractors - Look Before You Leap

Have you considered hiring independent contractors to help you meet your business goals? According to Robert Half Talent Solutions, 71% of companies expect to increase their use of contract talent in 2022. But before you have professionals complete a W-9 and start working, make sure that’s the right classification for the jobs you’re hiring them to do.

Some states, like Tennessee, have their own classification tests that can be found on their respective states’ Department of Labor websites. Others use the ‘ABC Test’ or the ‘Common Law Test’. You’ll want to know the law in your respective state, but commonalities are as follows:

Independent contractors typically do not provide the primary service or produce the primary product of your business

Independent contractors may work for a number of clients; they are not financially dependent on you

Independent contractors provide many of their own resources and tools to complete projects

In addition to any state ramifications, if the IRS determines you unintentionally misclassified an employee as a contractor, you are responsible for the following (taken from IRS.gov):

• A $50 fine for each Form W-2 that the employer failed to file.
• Since the employer failed to withhold income taxes, it faces penalties of 1.5% of the wages, plus 40% of the FICA taxes (Social Security and Medicare) that were not withheld from the employee and 100% of the matching FICA taxes the employer should have paid. Interest is also accrued on these penalties daily from the date they should have been deposited.
• Responsible for a Failure to Pay Taxes penalty equal to 0.5% of the unpaid tax liability for each month up to 25% of the total tax liability.

If the IRS feels the misclassification was intentional, business owners face the following:

• The employer could be subjected to penalties that include 20% of all of the wages paid, plus 100% of the FICA taxes, both the employee's and the employer's share.
• Criminal penalties of up to $1,000 per misclassified worker and one year in prison can be imposed as well. In addition, the person responsible for withholding taxes could also be held personally liable for any uncollected tax.

Independent contractors make invaluable contributions to businesses using their unique skills and abilities. You need to make sure that you treat your contractors in a manner that allows these professionals the space to fully use their talents while you maintain compliance with IRS laws. A trusted HR professional can help you navigate the laws that pertain to your business as it relates to hiring the talent you need to grow.

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