The Difference Between Independent Contractors and Employees Is a Lot Like the Difference Between Cats and Dogs
Earlier this summer, the US Secretary of Labor announced that the Department of Labor was withdrawing its 2015 and 2016 informal guidance on joint employment and independent contractors. A little over month later, the Internal Revenue Service released a reminder about the importance of correctly classifying employees and independent contractors. And then, soon after that, U.S. Representative Erik Paulsen (R-Minnesota) introduced a bill that aims to amend the tax code in order to help businesses take better advantage of independent contractors.
What does it all mean?
Basically, the laws aren’t matching up enough with employer behavior. There seem to be more disputes than ever between employers and regulators about worker status—that is, whether someone is an employee or independent contractor.
For some employers, misclassification arises from nothing more than confusion over what sets one label apart from the other. If you’re not sure how to classify your workforce, let’s pause and take a look at the differences between two analogous, but easier to understand groups: cats and dogs.*
- Dogs are by and large loyal and dependent creatures. They need to be taken on walks, can be trained to follow commands, come when they’re called, and typically grow attached to one particular person.
- Cats, on the other hand, are independent. They do whatever they want—whenever they want. They may bond with a certain person or people, but those relationships are harder to track and may be subject to change on the basis of mood, room temperature, the phase of the moon, or whatever mysterious force dictates feline behavior.
Both animals can be loving companions, but they show their love in different ways, and they have different needs. Anyone who’s ever tried to give a dog free rein—or worse, tried to train a cat—knows that you can’t treat one like the other.
Can you guess which animal corresponds to an employee and which is more like an independent contractor?
Not all employers who misclassify dogs as cats—I mean, employees as independent contractors—are ignorant of the differences. Some employers choose to ignore the law, or assume they won’t get caught, or figure that it doesn’t really matter. Regardless, to the DOL and the IRS, these employers are engaging in willful misclassification, a voluntary act that carries with it a steep fine.
According to the IRS and the DOL, if you tell someone what to do, when to come to work, and who to work for, you need to fulfill your responsibilities as an employer by withholding that person’s income taxes and paying their Social Security and Medicare taxes. Failure to do so triggers a penalty equal to the unpaid taxes—and regulators are increasingly assessing the fines against individual directors and finance officers.
The message should be clear: Pay an employee’s taxes, or give them the freedom to be their own boss.
Of course, as with all things on the federal level these days, that message may not remain the same for long. Worker classification is part of an ongoing dialogue between businesses and lawmakers. We’ll make sure to post about any updates on the topic, so subscribe to our blog so you don’t miss anything!
In the meantime, you can download our “Employee or Independent Contractor” worksheet to learn everything you need to know about how to categorize employees and independent contractors.
*Please remember that the people who work for you are human beings. If they’re not, you have bigger problems on your hands than worker classification.