Contractors and freelancers and temps … oh, my
By Lauren Caggiano
Temporary, part-time or contract help can be a boon to companies facing tight budgets and tighter deadlines. But with the added help comes a need for employers to do their due diligence when it comes to understanding and following employment law.
For starters, those in the position of hiring need to brush up on the different types of employment classifications, says Seth Morales, president of the Morales Group Inc. (MGI) The company was founded in 2003 and is headquartered in Indianapolis, with additional offices in Columbus, Indiana, and Louisville. Over the past 13 years, MGI has successfully placed over 40,000 associates throughout the Midwest in temporary, temporary-to-permanent and performance-based positions.
Information supplied by the IRS affirms Morales’ advice. According to a July 2017 fact sheet from the agency, employment status touches on several areas, including tax liability:
“Worker classification is important because it determines if an employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee. Businesses normally do not have to withhold or pay any taxes on payments to independent contractors. The earnings of a person working as an independent contractor are subject to self-employment tax.”
Another way to demarcate the relationship is by examining the expectations regarding how work is done. According to the IRS, generally speaking, the worker is an independent contractor “if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done.”
In other words, is the person getting paid solely to produce a determined deliverable, or is there some amount or degree of monitoring and managing of the person and the work in the process? If the answer is yes to the latter, then the person should be considered an employee and treated as such. There can be consequences for mistakes or oversight. “Classifying an employee as an independent contractor with no reasonable basis for doing so makes employers liable for employment taxes,” according to the IRS.
That can be avoided with some work on the front end. Morales said the easiest way to make the distinction about worker classification is to look at who handles the “back office activities.”
“When working with temporary (workers), a lot of the time they are being pay-rolled by another company,” he said.
Employment agencies are contracted to handle the necessary activities associated with employing a worker, including payroll, benefits, taxes, etc. In the case of a contract relationship, however, the responsibility rests on the self-employed individual to report their income to the IRS, pay local and state taxes, acquire benefits, etc. In essence, they are running a small business and managing the day-to-day responsibilities that entails.
Another lens through which to examine this issue is via the nature of the work, Morales says. Temporary workers tend to be more “blue collar” and paid an hourly rate to handle tasks that don’t necessarily require a high degree of specialty or advanced education. The example he cites is the front office administrative assistant. The individual may require more coaching or management than a white-collar employee. On the other hand, a contractor relationship can accentuate or complement your core product or services.
“A lot of times it’s contracting with someone with a specific skillset you don’t have in your internal staff,” he said. “Hiring a programmer or content writer are prime examples of 1099 or contractor relationships.”
Morales said in light of the gig economy, this type of work arrangement is being more widely adopted — what he refers to as a “secular shift.” As much as 20 percent of the workforce, he said, is currently freelance or contract labor. “It’s becoming more mass market,” he said. “The model of work is changing. It’s a cool space to be in now.”
While this may be a brave new world for some companies looking to expand their freelance workforce, they don’t have to go it alone. There are resources available for companies of all sizes and across all industries. Morales said employment law attorneys, online forums and organizations like the Society for Human Resource Management (SHRM) can help employers stay current on industry trends and changes. I