Are You An Employee Or Independent Contractor?

North Carolina Gov. Pat McCrory recently announced he will push legislation to penalize companies that knowingly and improperly classify workers as independent contractors to get a competitive advantage.

“It isn’t fair to the workers. It isn’t fair to those employers following the law. It’s not fair to the taxpayers,” McCrory said in an interview.

The Wage and Hour Division of the U.S. Department of Labor, under the auspices of Vice President Joe Biden’s Middle Class Task Force, also has increased its efforts to pursue the misclassification of independent contractors.

Independent contractors are sometimes referred to as “1099 employees,” where “1099” refers to the IRS form an employer provides an independent contractor at the end of the year. This phrase, however, is an oxymoron because one who receives a 1099 is not classified as an employee. Rather, they are classified (properly or not) as independent contractors.

With independent contractor status comes a larger burden on the individual (or business entity if one has chosen to create one for liability purposes). Persons who receive 1099s are required to file and pay their own taxes, and may also be required to pay self-employment tax. Alternatively, persons who are paid as employees generally avoid performing the additional accounting since the employer handles properly deducting and paying the employee’s taxes. Moreover, employers are also required to pay a portion of Social Security and Medicare tax equal the employee’s share – but independent contractors pay all of these taxes in the form of the self-employment tax.

Tests on how an employee is classified can be tricky. The central theme in most of the tests, however, is control. While a generalization for illustration purposes only, if you have a certain amount of control over the worker that worker is deemed an employee. The less control one exhibits over the worker and how the worker performs his or her job, the less likely the worker is an employee.

Even more simplified, one may look to any evaluation system used in providing feedback to a worker. If an evaluation system measures the details of how the work is performed, then these factors would point to an employee. If the evaluation system measures just the end result, then this can point to either an independent contractor or an employee.

Other factors often considered when classifying a worker’s job include:

  • Who provides the tools necessary in performing the job,
  • The possibility of a profit or loss for the worker as a result of services rendered,
  • Whether the worker is required to work full time for the business,
  • Whether the manner of payment is by the hour, week or month; versus, payment on a commission or job basis.

Importantly, the factors discussed above are not exclusive and are considered in their totality – not by merely tallying how many factors imply one status or the other.

To make an appointment to discuss proper classification of workers with one of our knowledgeable attorneys, contact the Lundell Law Firm in Monroe, NC. Call us today at (704) 288-4096, or request a consultation.

Restaurants and Servers Alike Taking Note of New Tax Law Affecting Tips

An updated tax law affecting gratuities that are automatically added to large parties should be carefully considered by restaurant owners.  Likewise, servers who previously enjoyed the guaranteed income from those large group “tips” now must wait for payday if the practice continues.

Effective this month, the Internal Revenue Service will begin classifying automatic gratuities as service charges—which it treats as regular wages, subject to payroll tax withholding—instead of tips, which restaurants leave up to the employees to report as income.

The IRS ruling was issued in 2012 to clarify and update earlier tax guidance on tips, which didn’t spell out how automatic tips were to be treated.  Restaurants persuaded the agency to delay implementation until 2014.

In a statement, the IRS said it noticed an increase in the use of “auto-gratuities” and that it believed “additional clarification in this area would be in the best interest of tax administration.”

The updated rule says the automatic tips are service charges because they aren’t voluntary.  In a question-and-answer section of the ruling, the IRS provided an example of a restaurant suggesting different tip amounts, and said that practice isn’t subject to federal withholdings because the customer is still free to choose whether and how much to tip.

Please contact the Lundell Law Firm if you would like to discuss the effect of this new law on your business.

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