Thursday, March 16, 2006

Do you know the difference?

Every year I have at least a couple clients who unwittingly mischaracterize would-be employees as "independent contractors". Baaaaaaaaaad idea.

In determining whether the person providing the service is an employee or an independent contractor, the IRS looks at a variety of factors, commonly referred to as the "20 factor test". All 20 don't have to be in favor of independent contractor or employee status in order to find one way or the other, but the direction in which most of the factors point will generally be the result. Particularly important in the analysis is the degree of direction and control the employer has over the worker.

The more control the employer has, the more likely it is that the worker is an employee under the law. Even "the right to direct and control" will be considered - whether or not the employer actually directs or controls the worker.

So what's the big deal? A nonprofit employer can be held liable for back employment taxes, plus interest and penalties, if a worker is incorrectly classified as an independent contractor. Depending on the number of workers misclassified, the amounts paid to them, and the length of time they were misclassified, the "hit" to a nonprofit's bottom line can be substantial.