Employee or Independent Contractor?

The national statistics show that approximately seventy percent of the existing employment was created by small businesses.  Hence because the small business owners are vital to the national prosperity, the need to educate these entrepreneurs is undeniable.  Even though making mistakes in the  running of a business is part of the learning process, some mistakes can have devastating consequences.

One of the most frequent and dangerous mistakes I have found is trying to  avoid paying employee taxes by classifying them as independent contractors. When employing a true independent contractor, the employer is not required to deduct income or social security taxes, nor is he/she required to pay unemployment insurance.  This simplifies the accounting process and gives the erroneous impression that it constitutes a savings.  Be aware that this alleged savings could be very costly.

The problem with this practice is that if the so-called contractors are, in reality, employees, the employer has exposed himself/herself to paying severe penalties and fines to the federal and state taxing authorities.  The investigations by these agencies tend to arise when an employee is terminated and he/she decides to seek unemployment benefits.  Even though an independent contractor is not entitled to unemployment benefits, the agency will initiate an investigation to determine if the independent contractor classification is consistent with the applicable law.

The agency then proceeds to apply certain criteria that revolve around the level of control that an employer exercises over the employee’s work.  If the investigation reveals that the employee was providing services on a continuous basis and was subject to the employer’s supervision, it is very likely the agency will find that the so-called contractor was in reality an employee.  This determination could have serious financial consequences for the business.

In addition to the fines and penalties that can be imposed by the state agency, it is very likely that the Internal Revenue Service  will also intervene.  Because an employer has a legal obligation to deduct income taxes from his employees’ compensation and forward these to the authorities, the employer may be held liable to the government for failing to comply with this statutory obligation.  Additional fines and penalties are possible because the employer failed to make its mandatory contribution to the Social Security Administration.  This combination of fines could be so severe that they could render the business insolvent.

Be assured that I am not exaggerating the seriousness of the possible consequences.  I have personally observed the destruction of various successful businesses as a result of the  severity of the fines.  Even though hard work and discipline tend to result in success, a crucial error could undermine one’s efforts and achievements.  The lack of knowledge could be one’s worst enemy.

Luis A. González
Attorney and Mediator
L. A. González Law Offices, P.A

(407) 649 - 8389
laglaw@cfl.rr.com