If you have hired a contractor to help you with your small business, you are not alone. There are many reasons hiring a contractor can be a great way to grow your business. But did you know that the IRS has special classifications for hiring independent contractors verses employees? If you don’t know the difference, you risk hiring a worker under the incorrect category, which could lead to penalties and unexpected employment taxes. Below is a brief breakdown of the categories used by the IRS to determine contractors vs. employees.
Behavioral Control: A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. An example would be training the worker how to do the job using your methods. Employees are typically trained on the job whereas an independent contractor would need little to no training and uses their own methods.
Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker’s job? Did the worker significantly invest in the equipment being used to work for someone else? Typically, a contractor would provide his or her own equipment.
Relationship: The type of relationship depends upon how the worker and business perceive their interaction with one another. Are the services provided a key activity of the business? Generally, this would be classified as an employee-employer situation.
There are more examples of each category here. The IRS looks at the facts relating to these 3 categories for each situation. If you are located in Washington state, the WA Labor & Industries has a 6-point test for determining contractors vs employees, which can be found here. If you are audited by L&I and have misclassified your contractors, you could be liable for workers compensation on their hours. If you are located outside of Washington state, we encourage you to research your state’s employment laws or get in contact with an HR professional that can provide the information for you for your area.
If you review the IRS rules and determine your contractors qualify, be sure you obtain a W9 form from each contractor as early as possible for your records. The W9 form will provide you (or your accountant!) with information necessary to issue a 1099 at year-end. The Joy Accounting team members are experts at tracking contractor payments during the year so there is no scramble come January. Feel free to reach out to us if you need help with contractor payments!
If you are a small business owner, you know hiring employees is an important piece of the puzzle. But did you know that laws exist governing the hiring process that make it illegal to ask certain questions to potential candidates? It’s important to educate yourself about these laws to be sure you are complying, keeping both you and your potential candidates protected. Below are some relevant laws in Washington state.
#1 – Employers are prohibited from discriminating against applicants with criminal backgrounds. This means you are not allowed to include any questions on your application (nor can you inquire verbally) about criminal history until after you have determined that the applicant is otherwise qualified for the position. The point of this is to give the opportunity for the applicant to prove they are qualified before ruling them out as a candidate solely based on their criminal background. You can read this law in detail here. (Note that this links to a .pdf and your browser may require that you verify it as a trustworthy source)
#2 – Recently, Governor Jay Inslee signed the Washington Equal Pay and Opportunities Act. This new law prohibits employers from seeking applicant salary history from current or former employers. Also, employers are required to set the minimum pay scale for an open position prior to posting the position. Statistics show a woman gets paid less than a man to perform the same job, and this law is aimed at removing this discrepancy. You can read more about this law here.
#3 – Employers are prohibited from discriminating against applicants based on their race, color, religion, sex (including gender identity, sexual orientation, and pregnancy), national origin, age, disability, or genetic information. In other words, don’t ask about the applicant’s 23andme results or anything remotely close to that in an interview! Here is a good article that gives examples of illegal questions and offers tips to handle these subjects if brought up by the interviewer. These discrimination laws are enforced by the US Equal Employment Opportunity Commission. You can read more about these laws in detail here.
Whether you are a small business owner or an individual
looking for a job, we recommend taking some time to educate yourself on these
laws. While these laws can make the hiring process more complex, we at Joy
Accounting are excited to base in a state that is putting guardrails in place
to protect individuals from unfair hiring practices. We look forward to the day
that discrimination in hiring practices can be done away with so that every
decision is truly based on merit, and not on societal bias.