Many business owners found out that having “independent contractors” instead of employees saves you money in payroll taxes and worker’s compensation insurance. Many times I’ve heard a business owner complain that everyone else is doing it in their industry, and they can’t remain competitive if they pay those costs. So why should the business owner care, and what are the potential problems?
Probably the most expensive part of non-compliance is the payroll taxes you pay if independent contractors are later determined to be employees. The IRS imposes a penalty of 25% in addition to the regular FICA taxes for both the employee and the employer. Not to mention the penalties for not filing the correct forms or paying the taxes on time. Depending on the time frame, you could double the cost of whatever you paid in “wages”!
Once an individual is determined to be an employee, then they can make claim for unpaid wages with the Department of Labor in your state, including any minimum wage complaints. Additionally, they can file any type of administrative action allowed by the federal Department of Labor (e.g. Americans with Disabilities Act).
Again, once the individual is determined to be an employee, the employer is completely responsible for any work related injury. This includes medical expenses and disability. Often times existing worker’s compensation insurance policies will cover independent contractors, but not always, and that assumes that you have insurance. If you don’t have any “employees” you probably don’t carry insurance.
Long and short of it is there is a tremendous financial risk in misclassifying people as independent contractors. All it takes is one injured person or disgruntled individual to start the process, and then you are on the defensive, and spending money in the process. Check out our Checklist here for some general guidelines or call us with your questions.
Contact our offices in Oklahoma City: 405-720-1244 or Tulsa: 918-477-7650 to get the help you need.