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.
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.
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:
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.
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