There has been an increased amount of attention on the misclassification of the employees as independent 1099 contractors, particularly over the past few years, and particularly in the construction industry. That is now amplified for all employers in the state of North Carolina with the new Employee Fair Classification Act (EFCA) that went into effect on December 31, 2017.
The EFCA created the Employee Classification Division within the Department of Revenue tasking that group with receiving and investigating complaints of employee misclassifications as well as coordinating efforts with the NC Department of Labor, the Industrial Commission and the Division of Employment Security to investigate other potential violations. When companies misclassify employees as independent contractors, they avoid paying state and federal payroll taxes, unemployment taxes as well as avoid buying worker’s compensation insurance. That is where the additional regulatory agencies come in.
Penalties for Misclassifications
Employers that are found in violation of the Employee Fair Classification Act are subject to fines, penalties, back taxes as well as owed wages and benefits at the state and federal levels. The impact can be significant, particularly to small businesses.
The new EFCA also requires that employers display the information related to workers rights under the EFCA. That information is included in the updated Wage and Hour Notice and Occupational Safety and Health Notice that are available for free through the NC Department of Labor website. The posters related to the EFCA, as well as all other state and federal workplace posters, are required of all employers and the posters are always free through the Department of Labor.
It is important for employers to take the time to evaluate their workforce to ensure that they are properly classifying employees and independent contractors to avoid penalties and fees. The IRS Website has easy to follow information that allows employers to easily determine if a worker should be classified as an employee or if they qualify as an independent contractor.
Guidelines on Classifying 1099 Contractors from Employees:
From the IRS Website: In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
Common Law Rules
Facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
Tax Breaks for Businesses
Not only does classifying workers correctly limit a company’s liability, there is also an opportunity to earn a tax incentive through one of the new tax law changes for 2018. In general, the new tax law allows qualifying business owners to deduct 20% of their net Income as a tax incentive, but it is subject to a threshold of 50% of their W-2 wages.
For additional information and details regarding this new tax incentive as well as all of the new tax laws for 2018, reach out to Eric Saxx, CPA with LB&J Certified Public Accountants with offices in Charlotte, NC and Ft. Mill, SC.
Employers Advantage LLC is available to work with small businesses that have 1099 contractors to conduct an assessment to determine if they are classified correctly and if they aren’t, then we will develop the compensation plan and communication strategy for converting any misclassified workers to correctly classified W2 employees.