As Idaho businesses navigate the economic uncertainties of the current recession, turning to independent contractors to do the work direct employees once did can be seen as a cost-saving strategy.
But incorrectly designating workers as independent contractors carries severe financial consequences.
"Independent contractors can be a valuable asset to a business," Idaho Department of Labor Director Roger B. Madsen said. “But there are specific criteria workers must meet to be considered contractors, and ignoring those criteria to improperly cut operating costs will become a drain on a business once it is discovered in addition to putting other businesses at a competitive disadvantage.”
Misclassifying employees as independent contractors can lead to significant federal and state tax liabilities, civil fines and even criminal penalties.
To be an independent contractor, a worker must be both:
• Free of the direction or control of the employer in the performance of the work, and
• Engaged in an independently established trade, occupation, profession or business.
A worker is not necessarily an independent contractor simply because the worker claims to be an independent contractor; signs a contract; is paid on commission, by piecework or by the job; performs services sporadically, inconsistently or is on call or works for more than one employer, although any of these criteria can be a factor in determining independent contractor status.
Among the critical elements is whether the employer controls only the outcome of the work. To that end issues of concern are whether the worker has a permanent relationship with the employer, receives employee-type benefits such as health care or pensions, performs work integral to the day-to-day operations of the business, has the right to determine his own hours or has his own operating costs and provides his own tools and equipment.
Businesses unsure about how to classify a worker can contact an Idaho Department of Labor tax representative at any of the department’s 25 local offices. Locations can be found at http://labor.idaho.gov, or they can file Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding” with the federal Internal Revenue Service.
"We want Idaho businesses to understand when it is proper to use independent contractors and when the worker is actually an employee,” Madsen said. "Avoiding what can be serious financial consequences from misclassifying employees is very important to us. We have a vested interest in seeing Idaho businesses succeed.”