Changing your business from employing independent contractors to employees could be quite the undertaking, but one that is well worth it to ensure you are legally compliant and not misclassifying workers, an issue for many small businesses. What will that conversion entail? How can it be done to best protect you and your business?
In a three-part blog series, we are going to talk you through the following:
- How do you know how the worker should be classified?
- What are the benefits W-2 employees have that contractors don’t and how do you structure the “new” hire’s compensation and benefits?
- How do you communicate the conversion to the worker and what extra precautions can you take to protect the business?
Let’s get started today with #1: How do you know how the worker should be classified?
First, ensure you are making the switch for the right reasons. The IRS tells us “[i]n determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. . . . Facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no ‘magic’ or set number of factors that ‘makes’ the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another. The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.” (https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee)