For the past decade, the IRS and New York State Department of Labor have attempted to minimize the number of misclassification cases of employees as independent contractors by responding with numerous guidelines and tests. While the labeling of a worker may or may not seem to pose as a significant issue, the classification of a worker impacts both the benefits of the worker and the taxes payed by the employer.
Companies that label their workers as independent contractors are exempt from paying federal and state employment taxes and insurance. This creates a financial incentive for companies to misclassify their workers, as they can evade paying certain taxes and providing employee benefits, such as sick days and paid vacation.
As a result, employees who were misclassified as independent contractors cannot obtain unemployment benefits, as they were not registered employees on a state or federal level. This is one of the most common ways employers are exposed for misclassification- when a worker files for unemployment after she/he was let go. Audits are then conducted to determine the right classification of the worker. If convicted of misclassification of workers, the employer faces hefty monetary fines.
When it comes to working with artists, the likelihood that employers misclassify artists increases. Questions surrounding the direction of a performance, whether pay is negotiable, and who pays for business expenses create a gray area between independent contractor and employee when working with certain types of artists. Therefore, it is imperative to examine the key differences between both.
What is an independent contractor?
The main characteristic of an independent contractor is their ability to fully control the performance of work.
Under NYS law, the factors which are listed, but not limited to, below are used to identify a worker as an independent contractor.
- has an established business of his or her own,
- advertises in electronic or print media,
- bought an ad in the yellow pages,
- uses business cards, stationary, or invoices,
- carries insurance,
- keeps a place of business and invests in facilities, equipment and supplies,
- pays his or her own expenses,
- assumes risk for profits or losses,
- sets his or her own schedule,
- sets or negotiates his or her own pay,
- offers services to other businesses (competitive or non-competitive),
- is free to refuse work offers, and/or
- may choose to hire help
What is an employee?
Ultimately, the key determining factor of an employee is that they do not possess the ability to control the performance of their work. Employees usually are not in control of setting their work schedules, they are under supervision, they do not pay for business expenses, and can terminate their services without liability.
The IRS released a 20-Factor Test (below) to help when classifying workers.
Understanding the differences between these two types of workers is significant for both the worker and the employer. Workers, if misclassified, are not receiving benefits they are entitled to, and employers, if they either intentionally or unintentionally misclassify a worker, face heavy fines.
Even with all the information provided by New York State and the IRS, worker classification remains a challenging task.
If you are unsure of how to classify a worker, schedule a free consultation with Morrison+Tenenbaum.