Status Classification: Exempt vs. Non-ExemptHR Resource
May 14, 2012 — 1,726 views
Employers and employees are faced with different types of classifications, with contractors being a frequently abused class. The IRS sets the tone for how an employee is to be classified whether it is exempt status, contractor or employee. For employers, it is important to understand the definition of a contractor vs. employee because of the laws that accompany each. Not complying with the laws as written runs the risk of fines and penalties from both the IRS and state labor boards.
One of two forms is used during the hiring process of an employee, the W-4 or the W-9. The W-4 is used for employees that have withholding taken out of their pay for income taxes. The W-9 is given to individuals that are hired as sub-contractors. Each form asks for specific information of the individual that are specific to the position. These forms are a declaration of employment status for the purposes of the business. Hiring employees with an hourly wage and withholding gives the employer control over the employee, whereas a contract employee cannot be controlled apart from submitting their work when requested.
In employment terms, control means being able to tell the employee their hours of work, changing those hours at will and creating a dress uniform or dress codes to be followed. When using contract employees, the employer cannot dictate any terms apart from following the contract. Therefore, a contractor can come to work at will, work any hours and cannot be forced to wear a uniform.
Employers who seek to circumvent paying withholding taxes frequently designate their employees as being contractors, yet still exercise control. Taking this action violates the spirit of the law as legally a contractor cannot be controlled by the employer. The state takes an interest in these cases as workers compensation laws mirror the IRS definitions for employees.
When an employer is found to be violating contractor status, the IRS has the liberty to audit the book going back as many years as necessary. This is done to determine how long the violations have been going on and how much the employer has to pay in payroll back taxes. Not only does the employer have to pay back the taxes, they also have penalties and fines that go on top of the amount owed. Misclassifying employees as contractors has the potential to be very expensive.