Publication date: December 10, 2024
Hey there, business leaders, HR pros, and fearless CEOs! Let’s talk about a topic that might sound like an HR nightmare, but trust us—it’s actually crucial for protecting your business. We’re diving into the classification of workers as employees (W-2) versus independent contractors (1099). Why? Because mixing these two up is easy to do yet can land you in hot water (or worse, an IRS or DOL audit).
If you’re thinking, “Oh, we’re fine—everyone’s on a 1099,” or “Our team’s all salaried; we’re golden,” then stick with us. There’s more to this than you might realize, and getting it right can save your business time, money, and a whole lot of headaches.
The Key Differences Between Employees and Independent Contractors
Here’s the thing: It’s not up to you, the worker, or even a handshake agreement to decide whether someone is an employee or an independent contractor. That decision? It’s made by laws that boil down to one major concept: control. And, of course, the DOL and IRS have slightly different laws. Michigan employers subscribe to the 20-factor IRS test, but it’s also important to consider the DOL requirements:
- The IRS 20-factor test can be viewed here: https://www.michigan.gov/leo/bureaus-agencies/uia/tools/fact-sheets/independent-contractor-or-employee
- The DOL regulations can be viewed here: https://www.dol.gov/agencies/whd/fact-sheets/13-flsa-employment-relationship
Phew. That’s a lot. Let’s break these down into a few key themes that can help you conduct a quick classification audit:
Employees
- Control: You’re the boss, boss. You have much greater control when, where, and how employees work.
- Tools and Training: You provide the tools, resources, and any necessary training.
- Taxes: You withhold payroll taxes, pay Social Security and Medicare, and often provide employee benefits.
- Longevity: Employees are usually (and in most cases, hopefully!) with you for the long haul.
Independent Contractors
- Control: They’re the experts you bring in to do a specific task. How they do the work? Not your call.
- Tools and Training: Contractors bring their own tools, skills, and know-how.
- Taxes: You pay their invoice, and that’s it—no tax withholdings or benefits from you.
- Project-Based: They’re in and out, often for a short-term gig or specific project.
Why Misclassification Happens (and Why It’s a Problem)
Here’s a common scenario: You need help but don’t want the commitment of a full-time hire. So, you label someone as a contractor and move on. No payroll, no benefits, no problem, right? Wrong. If that contractor’s role looks and feels like an employee’s, you could be violating labor laws.
Misclassification is a big red flag for federal and state agencies. And trust us, the IRS and DOL are not the pen pals you want. If you’re hiring a contractor but treating them like an employee, it’s time to pump the brakes. Misclassification can lead to penalties, back taxes, and legal fees. Ouch.
When in Doubt, Use Our Free Resource
We get it—navigating these waters isn’t easy. That’s why we created a free printable resource: “Employee or Independent Contractor? That is the question.” It’s an easy-to-follow reference guide that includes some, but not all, of the factors to help you make informed decisions. Click here to download it now!
Got Questions? We’ve Got Answers.
At Cooper People Group, we see this stuff everyday—and we’re here to help. Whether you’re staring at job descriptions and scratching your head or already worried you’ve got misclassified workers, we can walk you through your options, including how to convert an independent contractor to employee.
Drop us a note at hello@cooperpg.com or visit our Contact Us page. Because when it comes to protecting your business, the best strategy is to ask first and avoid the fallout later.
So, what are you waiting for? Start classifying with confidence. Your future self—and your payroll department—will thank you.