Employee Vs. Independent Contractor

In January, another law has taken effect concerning independent contractors. California AB 5 set companies like UBER, LYFT and DOORDASH on FIRE! It indicated that the workers of these companies are classified as employees rather than independent contractors. These companies, as well as a few others, are fighting this and asking for legislation to be “carved out” exempting them from this law. We will see how this works out.

I am always finding business owners in the dry cleaning industry trying to classify their employees as independent contractors. There are several rules that must be met to achieve this designation. The IRS is clear that there are no magic formulas to determine whether or not a worker is classified as an independent contractor or an employee. It depends on the specific facts of the case. However, the IRS almost always decides the worker in an employee!

Here are the factors the IRS considers when determining whether one is an employee or an independent contractor:

• Can the individual earn a profit or suffer a loss from the activity

• Does the individual furnish the tools and materials needed to do the work

• Is the individual paid by the job

• Does the individual work for more than one firm at a time

• Does the individual invest in equipment and facilities

• Does the individual pay his/her own business and traveling expenses

• Does the individual hire and pay assistants

• Does the individual set his/her own working hours

Let’s take as an example. You have a tailor/seamstress. He works at your plant; he has to be there set hours and he uses your equipment. He is your Employee. When I had my dry cleaner, I had a seamstress that came and picked up the garments and did the work at her house. She did not have set hours. I did not provide her with any materials necessary to do her work, so she was an Independent Contractor. Your presser is an employee. He/she needs to be there at set hours, and they use your equipment.

So how do you prove that someone is an independent contractor? Below I found some information on www.legalzoom.com:

A Written Contract. Outline the nature of the relationship since merely saying the person is an independent contractor doesn’t make it so. Indicate the job’s expected results, fee and dates. The contract should state the worker should use his/her own equipment/tools. Include the contractor’s business and tax ID number.

Proof Of A Real And Separate Business. Keep a copy of any letters on business stationery, business cards, brochures or advertisements. Print a copy of the person’s website.

Invoices. Base all payments to the contractor on their submitted invoices.

Form W-9. Keep a properly completed W-9 on file for each independent contractor.

You need to protect yourself. Over the years, I have seen many “independent contractors” file claims against the business owner they had been working for. If the contractor gets injured at your business, who will pay for this? Your Business Liability policy will not since the individual was working for you. As an employee, that individual is excluded for coverage under the liability policy. However, you might have to file a claim under your worker compensation policy. That claim will follow you for at least 3 years.

In addition, if you classify an employee as an independent contractor and you have no reasonable basis for doing so, you will be held liable for employment taxes. The IRS will not be happy with you.

There are so many rules and regulations we must follow in our industry. This is just another one, but it is easy to follow. I hope you found some value with this information.