Miscellaneous Issues — Employee or Independent Contractor is a legal issue that arises when an employer is unsure whether to classify a person as an employee or an independent contractor. This issue is often complicated and must be addressed carefully to ensure compliance with federal, state, and local labor laws. The difference between an employee and an independent contractor is that an employee is under the control of the employer and an independent contractor is not. The types of Miscellaneous Issues — Employee or Independent Contractor include: • Determining whether a person is an employee or an independent contractor • Ensuring that appropriate taxes are paid on behalf of employees • Providing benefits to employees • Establishing a contract between an employer and an independent contractor • Complying with state and federal labor laws • Investigating potential misclassification of employees as independent contractors • Resolving disputes between employers and independent contractors.
Miscellaneous Issues - Employee or Independent Contractor
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FAQ
A business may pay an independent contractor and an employee for the same or similar work, but there are important legal differences between the two. For the employee, the company withholds income tax, Social Security, and Medicare from wages paid. For the independent contractor, the company does not withhold taxes.
Key takeaways. Employee misclassification is the illegal practice of categorizing workers as independent contractors when they should be classified as employees. Misclassification is a form of worker exploitation that can result in the loss of public tax revenue and create unfair business competition.
Entities provide a Form 1099-Misc to independent contractors and Form W-2 to employees. See this article on worker classification for more information. However, there may be instances where a worker may be serving as an independent contractor and an employee for the same entity.
Are you paid an hourly rate? If so, you are likely an employee. If you pay for your own expenses and are paid a flat rate for the job you are likely an independent contractor. Also, if you are able to advertise your services to other companies, you are you likely an independent contractor.
In the U.S., for example, the IRS can levy a variety of fines for misclassification. Fines start at $50 per unfiled W-2, tack on 1.5% of the wages paid, then throw in unpaid FICA taxes for both employer and employee.
In the US, the penalties are as follows: Tax violation fines: $50 per W-2 tax form that the company did not file and a percentage of the misclassified employees' wages and FICA taxes. Payment penalties of up to $1,000 per misclassified worker.
Contractor misclassification is often an employer's attempt to avoid paying taxes. If caught, the employer is liable for unpaid taxes, employee back pay, and other legal fines.
Federal law violation fines This department hires auditors to identify and penalize independent contractor misclassification. At a minimum, consequences include paying back wages, but you could also face criminal penalties, including: Payment penalties of up $1,000 per misclassified employee. Jail time of up to a year.