In this article, we’ll discuss the difference between being an employee and an independent contractor, why being sure is important for both the worker and the company, what factors the courts look at when making a decision, and penalties for miss-classification.
Designation as an employee or Independent contract is important for many reasons, including, but not limited to, pension eligibility, workers’ compensation coverage, taxes, liability, etc. Often, when you are an employee it is very clear. Your employment contract has specific language concerning your role as an employee, and there’s little room for interpretation.
However, this is not always the case, and independent contractor agreements can sometimes be confusing and ambiguous. When a worker or employer is unsure Iowa has resources in the form of the investigators and auditors that work for the Iowa Department of Revenue and Iowa WorkForce Development. Ideally, the employer will have consulted the proper legal help when drafting their independent contractor or employment agreement and the worker will have done their due diligence and educated themselves on the difference between the two.
Determining Whether an Employee is an Employee or Independent Contractor
- How much will the employer control the work being done?
- What skill is needed to perform and complete the desired work?
- Who supplies the tools, equipment, and place of work for the project?
- How will the worker be paid? By time? (Hourly), a percentage, or a lump sum?
- Is the work part of the regular business of the employer?
- Is the work usually performed without supervision from the employer?
- Is there a specific time-frame for the work to be completed?
- Will there be consistent and similar work for an undetermined period of time?
Depending on the answers to the above questions you will start to have a better idea of whether the job should be filled by an employee or an independent contractor. There are other specific indicators that you are an independent contractor or employee, and as an employer, understanding these can save you a lot of time and frustration.
Classifying an Employee In Iowa
- By January 31st, the employer is required to provide you with a W-2, showing income you were paid and the taxes withheld;
- The employer must pay one-half of your social security and medicare taxes;
- The employer must pay unemployment taxes, and if you lose your job you may be eligible for benefits
Determining Independent Contractors in Iowa
- You should be keeping track of your own business expenses so that you can deduct them on your taxes
- You pay all your own social security and medicare taxes, approximately 15% of your income, and you may be required to mail in these payments quarterly
- Taxes are not withheld from payments to you, from the employer
Factors Courts Consider When Determining an Individual's' Relationship with a Company
Financial factors of a Relationship with a Company
- Did the worker have to make an investment into the company, and what amount?
- If an investment was made, the position would likely be classified as an Independent Contractor
- Does the work have the opportunity to leave you with a loss or a profit?
- If so, then it’s more likely an independent contractor position
- Are you paid after completion of the job and not eligible for reimbursement?
- If so, then it’s probably an Independent Contractor position
Relationship between the two parties and benefits
- Is the worker eligible for-, or already receives benefits, insurance, etc on behalf of the employer?
- If so, then the worker should be classified as an employee
- Is the service provided to the company crucial and ongoing?
- It’s probably an employee position
Job Requirements and Company Oversight
- Does the business control when, where, and how you work?
- If so, then it’s probably an employee position
- Does the company control what tools or equipment you use, how you can use them, what assistants you can hire, and what time you work?
- If you said yes, then it’s probably an employee position
Penalties for miss-classification of Employees
The penalties for miss-classification will mostly be felt by the company. The idea is to protect employees and independent contractors from being taken advantage of by companies that will normally have greater resources to challenge a lawsuit. If an employee is miss-classified by an employer as an Independent Contractor, whether deliberately or on accident, and the IRS reclassifies the independent contractor to an employee the company is on the hook for the following:
- A penalty of 1.5% of the amount paid to the employee, this is for income tax withholding;
- A penalty of 20% of what was paid to the employee, representing SS wages;
- Federal unemployment taxes based on the employee’s wages;
- An 8.5% interest charge on all the above
If after asking all these questions and you’re still not sure, you can fill out Form SS-8 and ask the IRS to decide. This can take up to six months and is not a guarantee either way. As a potential employee or independent contractor having a lawyer review the contract from the company is a great way to avoid any future problems; the same can be said for a company having their draft of an employment or independent contractor agreement reviewed by a licensed legal professional.