Going for a Test Drive in the Workplace: Independent Contractors
Going for a Test Drive in the Workplace: Independent Contractors

Going for a Test Drive in the Workplace: Independent Contractors

From the HR Pros of the HR Support Center

Independent contractors have been a common addition to many organizations for years, but have increased in use over the past several years as companies have shed their staff headcount. Independent contractors are secured either directly and work in a 1099 capacity or they are brought into an organization via the route of a third party staffing or placement agency.

The use of independent contractors is cost effective for organizations as the employer is not burdened with withholding payroll taxes, making matching payroll tax contributions, or covering the cost of the employee’s health and retirement benefit plans. Additionally, this is a great opportunity to see if an independent contractor will fit in with the organization’s culture as well as whether the individual will be successful in the role for which he or she was contracted. Independent contractors who find success in their roles and fit in well with a company’s culture hold an advantage should they be hired to become regular employees of an organization as their learning curve is substantially shorter than that of an individual who is hired into the company from the outside. The independent contractor has already had an opportunity to become acquainted with the organization’s industry as well with the dynamic of its employees. Additionally, opting to allow an independent contractor’s contract to expire if he or she is not a good fit for the organization is a simpler task than terminating a regular employee of the company.

Some disadvantages, though, are that the employer has substantially less control over an independent contractor. In addition, an independent contractor will not have the loyalty to the organization as would a regular employee. This can be problematic when employers need to strategize for succession planning and cross-training. With an independent contractor, employers do not have the same incentive to retain and train these workers as they would a regular employee of the organization.

If you are a business owner or contractor who provides services to other businesses, then you are generally considered self-employed. If you are a business owner hiring or contracting with other individuals to provide services, you must determine whether the individuals providing services are employees or independent contractors and ensure that the workers are categorized in line with their status.

It is extremely important to note that the IRS does not allow all workers to be classified as independent contractors. The IRS has strict guidance regarding the classification of W-2 employees verses 1099 independent contractors. The basic premise behind the determination is the amount of control that the company has over the worker and how the work is performed. Another large contributing factor is how important to the work is to the company’s core business.

The IRS uses a 20-step statutory test to determine whether an individual should be classified as an employee or contractor. This is certainly an area of the law where the IRS is increasing enforcement efforts. Therefore, it is critically important to ensure that workers are not misclassified as 1099 independent contractors when they should be W-2 employees. Misclassification could result in substantial back taxes, IRS penalties, liability for workplace injuries, retroactive benefits, attorney’s fees, and other monetary damages. The HR Support Center provides the IRS Independent Contractor Checklist to help you correctly classify your employees and independent contractors.

Want more helpful answers to your HR questions?

Subscribe to Paycor’s HR Support Center and find more HR resources and guides. Or, upgrade to HR On Demand to get personalized answers and advice from an HR professional. Contact us to learn more.

More to Discover

To Avoid an HR and Payroll Implementation Nightmare, Ask ONE Question

To Avoid an HR and Payroll Implementation Nightmare, Ask ONE Question

HR and payroll technology affect every aspect of your business, so if your current provider isn’t meeting your needs, your entire organization suffers. And yet so many business leaders settle for mediocre HCM because they’re (legitimately) afraid of implementing a new system. The good news: you can avoid an implementation nightmare by asking one simple question: Is My HCM Partner Collaborative? How can you tell if you’re working with a collaborative HCM company? It’s easy. Ask yourself: Do they talk more than they listen? If so, they probably aren’t taking the time to understand the particulars of your business, which is the root cause of most implementation nightmares. Related Article: 5 Questions to Ask Before Implementing a New...

5 Benefits of Online Payroll Systems

5 Benefits of Online Payroll Systems

There’s no denying we live in a digital world. We pay for fast food with our phone and use Venmo to repay a friend for concert tickets. Digital transactions are everywhere—including the workplace as more companies move to online payroll systems. Many businesses conduct their payroll process in-house in the form of full-fledged payroll departments or small business owners attempting to do it on their own. But there are a number of advantages to switching to an online payroll service. Take a look at some of the benefits your company or small business could reap by moving to online payroll. Online Payroll is More Affordable Do the math. How many hours does your accounting department or HR professionals spend preparing to run payroll and...

Rise Above the Status Quo: An Executive Summary

Rise Above the Status Quo: An Executive Summary

Our Biggest and Best Web Summit Yet! More than 18,000 people registered for Paycor’s two-day online Rise Web Summit, held in February, where industry experts offered advice on all things HR, from employee engagement to hot button compliance issues. If you didn’t get a chance to watch the webinars live, feel free to watch them on-demand. In the meantime, here’s a quick overview of each session and some of the key takeaways. The Future of HR Now more than ever, executives depend on the unique insights HR can bring to the table. However, there is a problem. Many HR leaders just aren’t thinking big enough. Our keynote speaker, DisruptHR’s Jennifer McClure, outlined four key strategies HR leaders can use to push past their comfort zones and...

RISE Web Summit: Overcoming Recruiting Challenges: How Technology Can Help

RISE Web Summit: Overcoming Recruiting Challenges: How Technology Can Help

Objectives of this session include tips on how to overcome many of your recruiting challenges and how the use of popular technology can save you time and money.