Do You Classify Employees as Contractors? You May Need to Stop

Throughout the past decade, many small businesses have saved money by classifying their workers as independent contractors. They do so because an independent contractor – who, by definition, would have more rights to take work elsewhere than a standard employee – doesn’t need to be afforded the same healthcare, and other costs, that a full-time employee is. However, a recent report from the Washington Post reveals that this strategy could end up costing much more than it’s worth.

According to one cautionary tale, one small business hired an independent contractors for a fixed-term project, only to find that contractor filed for unemployment benefits after the fact. The owner ended up going to court, and losing the case.

Not only did she have to pay thousands in back-taxes for the contractor who filed for the benefits, an audit revealed that the owner needed to make the same payments for three other individuals who had been misclassified as contractors.

To ensure your business never runs into this issue, here are a list of questions you should ask yourself before bringing on an independent contractor.

• Does your contractor work for other people at the same time they work for your business? Do they identify that additional work via their taxes?
• Does the contractor maintain a website advertising his or her specific services?
• Has the contractor provided you with filled-out tax forms?
• Can the contractor manage their tasks without significant oversight from you or another member of your business?

If you don’t feel you can confidently answer even one of these questions, you’d likely do best to make an individual in question an employee – not an independent contractor. Otherwise, you may run into both tax and legal trouble.