Using independent contractors instead of employees seems as good as striking gold in the backyard. With independent contractors you are not required to pay social security tax, Medicare tax, workers’ compensation premiums, federal unemployment tax and state unemployment tax. Moreover, you do not pay health insurance premiums, life insurance premiums, disability insurance premiums, sick days, vacation, or holidays. Independent contractors also cannot be organized by labor unions. What’s not to like? Is this the best thing since sliced bread? Maybe not.
Realizing that using independent contractors can significantly reduce labor costs, it seems that an increasing number of businesses are labeling workers as independent contractors without analyzing whether these individuals really fit within the legal definitions of independent contractors. Are they really employees?
The Internal Revenue Service, the Michigan Department of Treasury, Michigan and Federal Departments of Labor, the Michigan Bureau of Workers’ Compensation and the Michigan Unemployment Insurance Agency know two things:
- these agencies need revenue, and
- thousands of businesses have hundreds of thousands of workers who are misclassified as independent contractors.
For governments, this is the mother lode: billions of dollars in contributions to government agencies as well as fines and penalties are just waiting to be collected. Therefore, government agencies are increasing their scrutiny of whether workers are properly classified.
To determine whether workers are really independent contractors and not employees, both the federal and state governments use what is commonly referred to as the “24-Factor Test.” Although the state and federal governments emphasize somewhat different factors in their analyses, the short form of the test is as follows: Is the business simply looking to the worker for a result or is the business controlling when the work is done and how it is to be performed?
Some of the questions that must be answered to sustain the status of independent contractor are:
- whether the worker is told when to report to work and when to leave;
- whether the work being performed is integral to the business (e.g. whether the worker is making boxes for a box manufacturing company or whether he is painting the building);
- whether the worker offers services to the general public and is in fact performing the same services for other entities;
- whether the business furnishes equipment and materials; and
- whether the worker is primarily earning a living from one company.
The federal government tends to emphasize “control” — whether the business is controlling the worker or whether the worker is acting independently. The State of Michigan tends to emphasize whether the worker’s income is primarily from services performed for one business.
Properly classifying workers is important. Especially if there are a significant number of workers who are misclassified as independent contractors, it can be time consuming and expensive to rectify misclassifications. If you are using workers who could be misclassified, I urge you to contact labor counsel to review and, if necessary, correct the situation. Do not wait for the Internal Revenue Service to order you to complete and submit IRS Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding and the Michigan version of this form which is UIA Form 1015.
For further information regarding these matters, please contact Mr. Boyer at 248.740.5666 or via email.