THE "INDEPENDENT" CONTRACTOR.
The Labor Code defines an "independent contractor" as "... any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished."
The independent contractor is a person that you engage for a specific task. He is not your employee and is not under your control. Generally this person is self-employed as an individual or in a partnership. Example: a carpenter that repairs your furniture, an outside accountant or attorney.
The concern in this area is that there is a tendency, by the employer to classify the employee as an "independent contractor". The incentive by the employer is to avoid paying payroll taxes and Workers' Compensation insurance.
This is false economy, since it does not matter what classification the employer and the employee agree upon. The classification is going to be determined by certain criteria that is applied by the government independently of the desires of the parties, even when a written contract exists. Substance over form controls.
The government will apply the following criteria:
- Does the firm determine the hours to be worked?
- Does the firm control the manner in which the work is performed?
- Does the firm train the worker?
- Is the worker paid on an hourly basis?
- Does the firm pay for the material used?
- Does the firm provide the working tools?
- Is the work done on the firm's location?
- Does the firm guarantee a minimum amount of pay?
- Can the worker terminate the services at any time without incurring liability?
- Is the worker using your license to provide such services?
If the answer to most of these factors is "yes", then the worker may be classified as an employee.
Other factors to consider are:
- Does the worker have other clients?
- Does the worker have his own employees?
- How much has the worker invested in this task?
For IRS information regarding this topic click here: IRS
For Information from the State of California regarding this topic click here: FTB
WARNING: If the worker is reclassified as an employee the business will be responsible for all the payroll tax that should have been withheld, including the personal income tax that should have been withheld. This could destroy your business. The audits do not occur immediately after you pay the contractor. The audits take place, generally, about three years after the payment occurred. This means that you will have accumulated three years of liability. Once that the taxes, penalties, and interest are applied, your liability might be so great that you might not be able to recover from this disaster.
Don’t outsmart yourself. Bluntly, if you can not afford to pay your employees, as employees, you don’t have a profitable business.
In addition to the tax liability, there are Workers' Compensation insurance, and there may be labor law violation issues. Please read the accompanying article: The “independent contractor”. Legal issues.
|
