Hiring someone as an independent contractor might be more convenient and the benefits more fruitful (i.e. freedom from tax-withholding obligations and payment of workers’ compensation premiums), but you risk considerable tax fines, other penalties and a serious gap in insurance coverage if your independent contractors are later determined to actually be employees. Many small businesses hire independent contractors to fill positions such as administrative assistants, bookkeeping staff, personal assistants and other staff who would normally be considered non-exempt employees. But hiring someone like a personal assistant and classifying them as an independent contractor is a clear abuse of classification and will get you in big trouble.
In effect, when you elect to hire an independent contractor instead of an employee, you might be trading your immediate, limited savings on your workers’ compensation insurance for exposure to legal damages. Don’t believe me? A prime example is the March 2015 case brought against the popular ride-sharing company Lyft for misclassifying its drivers as independent contractors instead of employees. While the company settled and is reportedly now paying $12.25 million to drivers, which isn’t exactly chump change, the issue of whether or not Lyft drivers are contractors or employees still remains unresolved — proof that it’s a pretty complicated issue.
Lastly, in terms of payroll, by now you should already know that if a worker requires direction of how, when, where and what to do on the job, they are an employee that receives a W-2 with all income, social security and Medicare tax withheld. However, if the job will be done independently, your worker will receive a 1099 that is not subject to income tax and that worker will have to pay self-employment tax.
Read the full story at Independent Contractors and the Threats They Pose | Comstock’s magazine