Calling your Bluff – Misclassification of Employees as Independent Contractors

In your business, you may hire employees or independent contractors or both. But I have seen many businesses misclassify employees as independent contractors only to run into trouble with the IRS. And you really don’t want to wake up that beast!

Employees and independent contractors may practically do the same kind of work and spend the same amount of time doing the work. But from a legal perspective, there are certain factors that determine whether an individual is an employee or an independent contractor. Merely assigning the title of independent contractor to an employee will not satisfy a business owner’s legal obligations.

These misclassifications come to the surface usually during IRS audits of a company, or when a worker files a worker’s compensation claim for injury sustained or an unemployment claim. Penalties for such misclassifications run very high and could end up costing thousands of dollars.

Here are a few differences between an employee and an independent contractor that help determine their true title and position:  EmployeeIndependent Contractor1. An employee works under the supervision and control of the employer.1. An independent contractor works independently and is not controlled or supervised by the employer.2. An employee is entitled to employment benefits, such as, healthcare and disability.2. An  independent contractor is not entitled to any employment benefits.3. Employer withholds taxes and then pays out a salary to the employee.3. No taxes are withheld by the employer. Independent contractor is responsible for all taxes.4. Hours of work of an employee are set by the employer.4. An independent contractor sets his/her own hours of work. 5. An employee is entitled to receive worker’s compensation for injuries and unemployment compensation after termination.5. An independent contractor is not eligible for worker’s compensation or unemployment benefits.6. An employee usually works at the employer’s place of business.6. An independent contractor may or may not work at the employer’s place of business.

Misclassification of employees and independent contractors can have serious consequences. Small business owners tend to think that their businesses are small enough to not get audited. But they often do, and result in hefty penalties. So business owners, employees and independent contractors should take this seriously and contact an attorney if they are unsure about these classifications.

At Nupur Shah Law, we help business owners and independent contractors in determining their legal status and with legal contracts. Call us at 646-820- 1366 or email us at I am happy to have a complimentary conversation with you on how to secure your rights.

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