In February, Suzanne hired Philip to provide administrative help at $18/hour. She planned to let him work from home and set his own hours; to her, he was contract labor. Suzanne introduced him as her office manager and he begin to handle a lot of the client communication that happened during the business day. At the end of every week, Philip sent an email saying how many hours he had worked, and Suzanne wrote him a check.
But the work Philip did for Suzanne expanded, and by April 1, she created a space for him in the office, set up a computer and asked him to at least work weekday mornings, from 9 to noon. At that moment, Philip became an employee as far as the IRS is concerned, and Suzanne began to violate federal law.
Business owners often believe they are allowed to decide whether a worker is an employee or contractor, and too many times they choose contractor status to avoid paying the employer’s FICA match, along with state and federal unemployment tax.
In reality, it’s the IRS that decides whether a worker is an employee or a contractor, and the penalties can feel punitive.
Take a moment – soon – to run a 1099 report in your accounting software. It will show you any contractors you’ve identified. You have two tasks to tackle. If the worker is truly a contractor, be sure you have a W-9 on hand for them. If the worker’s responsibilities fall on the employee side of the Employee/Contractor test, you should get their status corrected, collect a W-4, and set them up on your payroll system as soon as possible.
If you’re not sure or you don’t have time to figure it out, call us. We’ll be happy to help get this question resolved before the IRS deadlines.