Independent Contractor or Employee?
Burlingame - San Mateo - Foster City CPA Since '88
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Important Update: California has a new law (SB 459, signed by the governor on 10/9/11) that's designed to crack down on the misclassification of workers as independent contractors and dramatically increases the penalties on employers who have been found to have willfully done so. The law applies to all businesses, but it's especially bad for licensed contractors, who if caught violating this law must be reported to the Contractors' State License Board, who will bring an action against the contractor.
The new law subjects first-time violators to penalties of $5,000 to $15,000 per violation, in addition to whatever taxes, interest, and tax penalties are due. Repeat violators can be subject to penalties as high as $25,000 for each individual violation. And the final kicker: Violators are required to display on their websites for one year a notice to employees and the general public announcing that the employer "has committed a serious violation of law by engaging in willful misclassification of employees."
Is your worker your employee or an independent contractor?
It comes down to a question of control. If you ...
- Employ him for an indefinite amount of time (no fixed termination date),
- Tell him when to show up and when to quit,
- Train him how to do the work, and
- Provide all of the supplies, equipment, vehicles, etc.
Then he is your employee. It doesn't matter if he works part-time or full-time.
On the other hand, if ...
- You employ him just to perform a certain one-time task or contract,
- That task is not part of your regular business,
- He sets his own hours,
- He already has all of the knowledge & skills necessary,
- He provides his own supplies, equipment, vehicles, etc.,
- He may hire people to assist him,
- He works for other people at the same time that he works for you, and
- He has a business, as evidenced by a business license
Then he is an independent contractor
But what he doesn't fit neatly into one class or the other? Then it's a judgement call. How many factors point one way and how many point the other way?
What if you've been misclassifying workers?
The IRS has an amnesty program called the Voluntary Classification Settlement Program (VCSP.) It allows employers to (1) come forward if they are not under audit, (2) reclassify independent contractors as employees, and (3) pay an amount much, much less that what would be owed if they were discovered at audit, generally 10% of just one year to settle all years.
The information above is a general outline. Questions about your specific situation should be discussed with an experienced CPA.
March, 2012
