By K. Michael Ward, MPH, SPHR, GPHR, Employee Benefits Advisor
The Wilson Agency
A UBA Partner Firm
As a business professional who is trying to classify a worker, it is important to remain compliant with the IRS regulations that determine whether an individual providing services to your organization should be classified as an independent contractor or an employee.
Furthermore, the "employer mandate" section of the Patient Protection and Affordable Care Act (PPACA) requires companies with 50 or more employees to either provide adequate and affordable coverage to their workers or pay tax penalties. United Benefit Advisors (UBA) has developed a guide to help employers determine how many employees they have for several purposes under PPACA. Those who think they are exempt need to make sure they are counting employees correctly so they’re not surprised with penalties.
The guide provides the definitions of full-time employees, how to count part-time employees on a pro-rata basis, how to treat seasonal employees, who the law considers an "employee," counting hours correctly, determining average hours worked, penalties that result if a "large employer" doesn't offer coverage, applying the requirement to offer coverage, paying the penalty, and eligibility for the Small Business Health Options Program (SHOP).
Your UBA Partner Firm can help you find the compliance solutions specific to the issues your company is facing. Visit the UBA website to learn more.
Why does it matter?
Not correctly classifying an individual as an employee can lead to an employer being required to pay taxes, such as unemployment tax, that would have been required of the employer if the individual had been correctly classified. The organization may also be held liable for overtime pay, resulting in a costly expense for the organization. In certain situations, the issue can escalate leading to civil lawsuits against the employer.
How do I know how to classify individuals?
Generally, an individual is an independent contractor if the employer controls only the final result of the work and not when, where and how it will be done. Therefore, employers cannot demand that independent contractors work a “9-5” schedule in their office. If the person is an independent contractor, they are free to perform the work on a beach at 4 a.m., as long as they produce the services for which they were hired.
An individual may also be classified as an employee if the company provides the majority of the equipment used to perform the services. Independent contractors will generally work with their own equipment and are unlikely to be reimbursed for any equipment purchases required to perform the job.
Some others factors to take into consideration are the time period of hire and whether the individual provides services that are integral to the business. If an individual has been hired on an indefinite basis, versus for a specific project or time period, and/or provides key services, then the employee may be classified as an employee.
There are a variety of other nuances that can determine whether an individual is an independent contractor or an employee. Therefore, it is advised that you speak with a professional before taking action that could have an adverse effect on your business.