The biggest payroll mistake a business owner can make is misclassifying your workers. Typically, the mistake comes from when an employer classifies workers as contractors when they are actually employees. No problem if your workers are contractors, but make sure they actually are.The frustrating thing is that in many cases it’s not 100% clear; it’s like asking if a shade of gray is closer to black or closer to white; it all depends on where the authorities consider the 50% mark to be.
Some readers of this post might also be workers trying to figure this out, making sure you aren’t being taken advantage of. If after reading this post you think this might be your situation, seek the advice of a labor lawyer, which I am not.
So what do legal authorities consider when determining who is a contractor and who is an employee? How do you classify Employees or Contractors? There are three sets of questions: Behavioral, Financial, and Relationship Type.
Classify Employees or Contractors by Behavior
Answer these questions:
- Does the employer control when and where the employee works?
- Does the employer control HOW the worker does their job duties?
- Does the employer provide ongoing training to improve the worker’s performance?
The more YESES you get to these questions, the more confident you can be that the law will see the worker as an employee.
And in case you’re wondering, YES, remote workers are still employees.
Employers have Greater Financial Control (and Risk)
- Does the worker receive a salary or hourly pay?
- Is the worker unlikely to incur a loss or make a profit?
- Does the employer provide the tools and supplies needed to complete the job?
More YESES means the worker is an employee
Employers Make Contracts and Provision for their Employees on a Continual Basis
- Is there a written contract between the employer and the worker?
- Does the employee have a continuous relationship with the employer (past one project, for instance)?
- Does the employer offer benefits, like insurance plans, 401k, sick pay, maternity leave, etc.?
So far we have nine questions. If you said yes five or more, you have no business classifying workers as contractors without consulting a labor attorney to make sure you’re on the up and up. Three or four might be risky as more and more of the workforce becomes dependent on large companies offering ‘gig’ opportunities.
The cost of misclassifying your workers is very high, as it leaves you open to fines, lawsuits, and tax penalties. It also costs workers so much that as an employer, you could get a reputation for being a low-trust employer that no smart worker should work with. It’s a brain-drain of your own creation away from you and towards your competitors.
Bookkeepers Classify Things For a Living
As a bookkeeper, I save you time and money. Plus, I am an independent contractor for sure. Schedule a call with me to talk about your bookkeeping needs, whether it’s classifying expenses, bills, invoices, or payroll. I typically save business owners 80+ hours/year on their bookkeeping compared to doing it themselves.