More small businesses turning to Independent Contractors —
and why it’s a potentially dangerous move
A recent SurePayroll
study (http://blog.
surepayroll.com/
august-2013-scorecard/) says that
22% of small
business owners
are more likely to
hire independent
contractors than
full-time workers in
the coming months.
W
hy? Of those who said they’re planning
on going the IC route, about half said
it’s just simpler to hire somebody
to perform a specific task than
to bring on a full-time employee, SurePayroll
president Michael Alter wrote recently on Inc.
com. (http://www.inc.com/michael-alter/20percent-businesses-prefer-independent.html)
What’s more, Alter said, using an IC means not having
to worry about payroll taxes and benefits, which
saves businesses money. At the same time, they’re
able to take advantage of the specialized skills these
contractors offer. Thirty-six percent of small business
owners said reduced tax and benefits costs was
the top reason they hire independent contractors.
And (surprise!) healthcare reform comes into the
picture, too. Almost one in four (23%) of the
owners leaning toward ICs said they were doing
so to keep their full-time workforces under the
magic number of 50 — where all those complicated
Affordable Care Act rules and regs kick in.
Stakes get higher
The advantages of using independent
contractors aren’t hard to see. But the tactic
carries some fairly serious legal risk.
Why? The ACA will now require employers
to put even more effort into making sure
workers are classified correctly.
Original story found here:
http://www.hrmorning.com/
more-small-businesses-turningto-ics-and-why-its-a-potentiallydangerous-move/
6
Prior to the passage of Obamacare, difficult
economic conditions and tighter budgets
sparked many employers to start using more
independent contractors. Unfortunately, some
of those employers overstepped their bounds
Accolade
OCTOBER 2013
and misclassified individuals who should’ve
been employees as independent contractors.
As a result, the IRS and DOL started an
all-out war to hunt down employers who
misclassify workers and slap them with large
fines, and back pay and tax penalties.
The added incentive to classify workers as
independent contractors combined with
increased enforcement by the IRS and DOL
is a dangerous cocktail for employers.
The inherent danger in misclassifying employees
as independent contractors grows exponentially
when the clock strikes midnight on Jan. 1,
2015 — that’s when enforcement of the shared
responsibility requirement will kick in.
At that point, the penalty for misclassification could go far beyond paying the now
standard-fare IRS and DOL fines and enter the
zone of uber-expensive Obamacare fines.
What if you were audited?
The ACA’s shared responsibility requirement
states that large employers (those with 50 or
more full-time equivalent employees (http://www.
hrbenefitsalert.com/health-reform-irs-offers-safeharbor-on-calculating-full-time-status/)) must
offer its employees “minimum essential coverage.”
(http://www.hrbenefitsalert.com/feds-issuelong-awaited-essential-health-benefits-rule/)
health insurance on an exchange — then the
employer must pay a $2,000 per-employee
penalty for every full-time equivalent employee
on staff (minus the first 30 employees).
First and foremost, when classifying workers,
follow the IRS’ three-point checklist (http://
www.irs.gov/pub/irs-pdf/p1779.pdf ) for
determining a worker’s classification:
So how would this impact
an employer guilty of
misclassification?
1. BEHAVIORAL CONTROL. The IRS says if your
company has the right to control or direct not just
what work needs to be completed, but how it gets
Say your company employs 45 full-time employees. completed, the worker is most likely an employee.
It considers itself a small employer under
Obamacare and therefore isn’t subject to its
2. FINANCIAL CONTROL. There’re two financial
shared responsibility requirement. Therefore, it
signs that can indicate whether a worker is an
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