A “First of its Kind” PFML Plan launches in New Hampshire
Beginning in December 2022, employers can start enrolling in New Hampshire's new voluntary Paid Family and Medical Leave plan for employers and employees of all types of businesses.
Defining and on-boarding employees correctly is essential to any business. But for some, distinguishing between employee and independent contractor becomes fuzzy.
An employee is a person who performs a service, with the employer controlling the methods and the results of the work done. Employers must withhold income, Social Security, and Medicare taxes from each employee’s paycheck. They also must match Social Security and Medicare taxes from their employer wages. Independent contractors must pay 100% of their tax liability. Contractors, however, maintain the control of how and where their work will be done.
Despite having clear cut definitions, employers frequently misclassify employees as independent contractors, whether by earnest mistake or in an attempt to bypass paying withholding taxes. This type of misclassification of workers has led to substantial losses for in revenue for the federal government. Because of this, the Internal Revenue Services is ramping up their efforts to identify cases of misclassification. To avoid a run in with the IRS, here are tests payroll and human resource departments use to determine employee status.
Employers can determine most workers’ classification under the 'common law test.' The IRS itself uses this test to classify its workers. Under the common law test, control of what work will be done and how it will be done is key. If an employer has this control, then that person being tested is a common law employee. The employee-employer relationship is solid if this determination is made. If an individual has control of the results, but not the details, that person would not qualify as an employee. It is important to note it does not matter what an employer calls his or her workers - they could be 'agents' but still regarded as employees in law.
The aforementioned control of work and how work will be done can be split into three categories: financial, behavioral, and the type of relationship between the two.
If a business controls the right to direct finances, the worker is an employee. The following instances putting that control in the hands of the worker would qualify him or her as an independent contractor:
These include factors that determine who has power to direct and control details by which and where the worker performs his or her tasks. Indicators include:
How an employee and employer interact versus how an independent contractor interact and employer interact is very different. Here are some clues:
Even if a worker meets the criteria of an employee under the common law test, he or she may be still considered an independent contractor and exempt from federal withholding if the employer has 'reasonable basis' to do so. Here’s what qualifies as a reasonable basis to not withhold federal withholding from a worker’s paycheck:
Becoming familiar with these tests can aid employers when determining if a new hire is an employee or independent contractor, and subsequently help lower the amount of misclassified workers currently performing services.