MISCLASSIFYING EMPLOYEES AS INDEPENDENT CONTRACTORS

By Kent Berk on March 24th, 2010 in BLOG, BUSINESS LAW

With everyone looking to tighten their belts in today’s economy, the question comes up whether a business should try and save money by reclassifying its employees as independent contractors. Some of the potential savings of using independent contractors may be in the areas of workers’ compensation insurance and payroll taxes. Businesses are generally required to provide and pay for workers’ compensation insurance for the benefit of their employees. Businesses are also generally required to withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to their employees. Independent contractors are not employees and thus do not trigger the incursion of these costs by those businesses for whom they provide services.

Misclassifying an employee as an independent contractor, however, may have tax consequences. In addition, misclassifying an employee as an independent contractor may result in the business having to back-pay premiums otherwise owed for workers’ compensation insurance. A business may also face liability if an employee were to get injured on the job for which there was no workers’ compensation insurance because the injured employee was misclassified as an independent contractor. It is therefore important to understand the difference between an independent contractor and an employee.

Generally speaking, the issue boils down to how much “control” your business has over the person performing the services. The more control, the more likely you have an employer/employee relationship as opposed to an independent contractor relationship.

To learn Arizona law regarding employee classification, please visit our Employment Classification page.

Before deciding whether your business should reclassify its employees as independent contractors, you should consult with your attorney and tax advisor. Contact the experienced business and employment dispute attorneys at Berk Law Group, P.C. today.