Business Owners Beware: Misclassifying Independent Contractors Can be Costly.
Business owners are always in search of new creative ways to reduce their overhead costs and expenses while maintaining the quality of their good or service with maximum efficiency. Businesses and business owners have increased their use of independent contractors rather than employees to reduce their costs while maintaining everything up to their set of standards without a loss of quality. With regards to independent contractors, business owners are not required to withhold payroll taxes, pay other withholdings (i.e., FICA, Medicare), or provide workers’ compensation coverage. Beyond that, businesses are not required to include independent contractors in any benefit program (i.e., health, dental and other benefits).
Declaring a worker to be an independent contractor doesn’t necessarily make them one; even if you sign an agreement that calls the worker, an independent contractor may also not be sufficient enough. The reason for this is because the legal definitions and the tests used to classify a worker as an employee or independent contractor vary. Under Colorado law the test for determining a worker’s status is not necessarily the same analysis used by the Internal Revenue Service (IRS); classifying a worker is ultimately based on a question of fact on a case-by-case basis and the criteria used are somewhat subjective.
Failing to classify a worker accurately as either an employee or an independent contractor can be very expensive to a business. Classifying a worker as an independent contractor that the IRS or the Colorado Department of Labor deem being an employee, the business owner could be subject to liability including (without limitation) for unpaid wages and benefits, income tax withholdings, matching FICA payroll taxes, Social Security and Medicare taxes, workers’ compensation insurance, and unemployment insurance.
If you are a business owner and you are choosing to use the services of independent contractors, you need to have an understanding of the tests that apply to classify the worker as an independent contractor.
Be sure to visit our other Article’s & Resources relating to the classification of Independent Contractors:
IRS 3 Part Test
Colorado Employment Law
5 Tips for Proper Classification
Thanks to our friends at Colorado Biz Magazine for the article "Hiring Freelancers? Here's What You Need to Know," which highlights some of the advantages of hiring freelancers.
If you are still unsure or have any questions regarding the proper classification of an independent contractor, please don’t hesitate to ask us at MB Law: email@example.com
* This information is for general purposes only and is not intended to constitute any specific legal advice of any type.