You hire independent contractors to help you with specialized or contract work. But if you find yourself engaging in what may be considered an employer-employee relationship with your independent contractor hires, you may be contacted by the EDD and the IRS for a potential mislabeling claim. Mislabeling is one of the reasons the EDD may conduct an audit of your business, and it might result in a refund, back taxes owed, or potential penalties.
When working with independent contractors, there are a few pitfalls to be aware of so that you don’t accidentally treat your independent contractors like your employees. Here are a few behavior scenarios that could lead to potential issues when working with independent contractors.
1. Making Regular, Long-Term Relationships
Contractors are normally hired to work for you on a per job or per project basis. So if you offer up an indication that you would like them to work for you long-term, exercise some caution. Indicating long-term employment to an independent contractor could appear like an employer-employee relationship in the eyes of the EDD, and you may have a misclassification problem on your hands.
Although you want to establish a good working relationship with a contractor, setting an expectation of a long partnership with many projects could suggest that they are an employee.
2. Dictating the Use of Equipment or Software
Contractors will determine the tools and equipment to use for their job. If you offer suggestions, it might appear as though you are engaging in an employer-employee relationship by exerting some control over the contractor. If you tell a contractor what type of software he or she should use, you may jeopardize your relationship with your independent contractor — and this interaction may be viewed as an employer-employee relationship by the EDD.
Let your independent contractors know they are free to use whatever they want to as long as the job is done per the terms of your contract.
3. Setting a Schedule for Contractors
Another common mistake you might make is to direct when a contractor must work. If you suggest or direct when a contractor takes breaks, or even what time of day they need to start work, it might give the impression that they are an employee. By establishing a schedule for your contractor outside of assignment deadlines, you could be seen as engaging in an employer-employee relationship.
4. Making Contractors Work in the Office
If contractors are working in your offices or place of business, this may cause some labeling issues when determining if they are a contractor or an employee. If a contractor is working out of an office alongside full-time or part-time employees, they might be confused or misclassified as an employee, especially if they are working similar hours and performing similar tasks.
5. Paying Wages and Expenses Incorrectly
Salary or hourly wages are are reflective of employee behavior. To avoid any confusion, it’s best practice to pay contractors by the project.
Contractors also pay for their resources and supplies. If want to provide them reimbursements for these costs, it may look like you are treating them similarly to your salaried employees — and they might be labeled employees by the EDD.
If you think your business has made one of these mistakes, contact a tax attorney and talk to them about any potential mislabeling of your employees or independent contractors. Let an attorney explain to you any possible implications and discuss potential penalties.
Contact the offices of Milikowsky Tax Law today to find out how we can help you best mitigate any potential damage to your company and help you set yourself up for success in the future.