Independent Contractor Or Employee: Why Does It Matter?

Every year around tax filing season, many workers will discover that their employment isn't quite what they thought it was. Companies, looking to save money, may classify a worker not as an employee but as an independent contractor. While this doesn't seem like a big distinction to the average person looking for work, it can have huge and expensive consequences to the individual. 

So, why is it a big deal?  Because many employees who have been misclassified as independent contractors don't understand that they lose out on many benefits of being an employee. They also are going to be liable for higher costs. Here are a few ways the misclassified worker is harmed.

No Workers' Compensation or Unemployment Insurance.   A very important employee benefit and right is legally-mandated workers' compensation insurance. If an independent contractor is injured on the job, the company does not hold the same liability to pay for injuries, rehab, or time lost. If that independent worker is let go, they also do not qualify for any unemployment insurance. Most misclassified workers don't understand this until after they are injured or laid off and find themselves without help. 

You Pay All the Taxes. Employees are expensive, sometimes costing close to 30% more in benefits. A big part of this added cost to a company are the payroll taxes that must be paid. An independent contractor must foot the entire payroll tax bill, rather than split it with his or her employer. This can add a big-- and often unexpected-- expense when filing taxes. 

Higher Audit Risk. Taxpayers who file a Schedule C have a greater chance of being audited than one who only files W-2s.  Being subject to audit on one matter can also open up the taxpayer to audit of other years and other forms. 

Additional Tax Preparation. Filing a Schedule C adds to the time and cost of preparing taxes. It requires maintaining records of income and expenses and filing as a person who is running a business. Most misclassified workers won't have such records or have to spend time and money recreating them. 

What can you do if you've been misclassified as an independent contractor?  You may talk with the employer to clarify why you were not classified as an employee and correct the oversight. If this fails to resolve the problem, contact the IRS and complete Form S-8 to request a determination by the IRS on your correct status. If you suffered a workplace injury and your claim has been denied due to not being considered an employee, contact a qualified workers' compensation attorney, like those at Robinson & Kole. If you were laid off, file a claim with your state unemployment insurance agency, explaining that you've been misclassified. 

Whether or not you've already been harmed by being considered a non-employee, fixing the situation now can save your financial future later.