With everything that is happening with COVID-19, there are opportunities that have opened up for Small Businesses that haven’t been available in the past. One of the benefits of having your financials in order is being ready when challenges or opportunities arise. Those who don’t, lose out because they’re too busy scrambling to get their paperwork together.
1. Positioned For Opportunity
While many companies are currently submitting applications for Paycheck Protection Program Loans to keep their workers employed and their businesses afloat some are unable to submit an application at all because they don’t have their workforce categorized correctly or haven’t maintained good records so that the information required is readily available.
Initial information regarding the loans implied that independent contractors who assisted in providing products and services that businesses offered for resale would be included in the calculations for the amount that could be requested. Later clarification was provided and the contractor payments were excluded so for an employer with a large number of independent contractors they were either ineligible or the amount of the funds available was greatly reduced leaving many of them with no financial support during this difficult time.
2. You Reduce Your Overall Risk
In addition to this loss of opportunity there are other risks associated with not classifying your workforce correctly. Independent contractors do not have payroll taxes withheld from their wages and the employer does not make contributions to social security, medicare, state and federal unemployment as a result. The Department of Labor regularly conducts audits of employers’ payroll and independent contractor records and if the employer is found to have a team member classified as a contractor when they should have been an employee then they will calculate the back taxes owed and require the employer to pay them.
In the normal business environment it would also make the team member ineligible for unemployment should their position end. We recently had a client come under the scrutiny of the Department of Labor because a contractor filed for unemployment and listed them as their employer. We were able to refer them to an employment attorney to assist in the appeal process and luckily, they won their appeal, but this could be devastating to a small business.
The IRS has specific guidelines on when a worker should be considered an employee as opposed to an independent contractor.
There are three main factors that determine a worker’s status – behavioral control, financial control , and relationship of the parties.
The more control you exercise over the worker’s behavior, the more likely the person should be classified as an employee. If you are telling the worker how, when, or where to complete the work, what tools or equipment, to use, where to get supplies for the project and who to use to help with the project then they are an employee. If you are assigning a project with a deadline and then leaving the work to complete it then they can be classed as an independent contractor. If the business provides specific training on processes and the method to be used to complete the project then the worker should probably be considered an employee.
For a worker to be considered an independent contractor they would need to bear some financial control over their work. For example, if they had to make a significant investment in order to complete the project, or incur expenses to complete the project with no anticipation of reimbursement and have the ability to control the profit or loss generated by a project then independent contractor status is more appropriate.
Relationship of the Parties
The relationship between you and the worker also influences their status within your organization. Providing benefits to a worker typically implies an employer/employee relationship. If no benefits are provided then the worker could be classified either way. The presence of a written contract between the employer and the worker can also influence the worker’s status. If you are engaging a worker as an independent contractor then having a written contract outlining the work to be performed helps to demonstrate the worker’s status in the event of an audit.
All employees should have employer taxes paid and reported on a W-2 at the end of the year. Independent contractors should have a 1099 issued at the end of the year reporting the amount paid for project work for the calendar year. In order to obtain the correct information to issue the 1099 at the end of the year we recommend that you request a completed Form W-9 from the contractor and do not make your initial payment for services received until the documentation is provided.
3. More Funding, More Funding, More Funding
Lastly, the Economic Injury Disaster Loan payments have been based on the number of employees at the time of the disaster. If your workers are categorized as independent contractors then the amount available will be adjusted to $1,000 per employee instead of the full $10,000. If they are categorized correctly as employees then the full amount of funding for teams of 10 or more would have been available.
If you are unsure about whether you are categorizing your team correctly we’d be happy to review these rules with you and provide feedback on any adjustments you should make moving forward.