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Make the independent contractor vs. employee decision before you bring person on board

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in Leaders & Managers,Management Training,Small Business Tax,Small Business Tax Deduction Strategies

Conferring independent contractor status on a person often benefits the employer, which is then not obligated to withhold income tax or to pay Social Security taxes for the worker. But the decision isn’t yours to make alone. The IRS sets guidelines on the decision (see box below).

Just make sure you make the employee-or-contractor call before you hire the employee. Don’t assume you can make the designation later.

That usually won’t work. And you probably won’t even discover the problem until it’s too late to fix it—when a terminated worker files an overtime lawsuit.

Recent case: Rexhep Bulaj did maintenance work for an Illinois real estate company in exchange for a weekly salary and a rent-free apartment. He received a regular paycheck with tax deductions and got a W-2 at the end of the year. He had to be on duty at specific hours and at specific properties. Over time, his duties expanded to include showing empty apartments to prospective tenants.

When he was fired, he filed a Fair Labor Standards Act lawsuit, alleging that he regularly worked more than 60 hours per week, but had been paid only a set salary.

The company didn’t argue that Bulaj was an exempt salaried employee. Instead, it claimed he should have been classified as an independent contractor. Reason: His work schedule was entirely up to him and he provided his own tools.

The court said that wasn’t enough to make him an independent contractor, given all the other evidence that the company had treated Bulaj as an employee for more than a decade. (Bulaj v. Wilmette Real Estate and Management, No. 09-CV-6263, ND IL, 2010)

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