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Who Did I Hire? The Misclassification of Contractors & Employees

Updated: Nov 21

For a new business owner, at first glance, it would seem that hiring independent contractors would be the more cost-effective choice in comparison to hiring employees. Paying for overtime & sick days, employer taxes, unemployment, and also providing insurance benefits adds up. If you’re starting a business, who needs the extra expense?

The difference between an independent contractor and an employee is important to understand. The misclassification of independent contractors and employees is a common occurrence, and may not have been done intentionally, but if the IRS, Department of Labor, or the National Labor Relations Board determines a worker has been misclassified, the employer could be responsible for past employer taxes plus penalties & interest, hourly overtime, and more.

In the worst case scenarios, companies could face lawsuits resulting in large settlements. Microsoft was required to pay $96.6 million 2000, Instacart settled their class action lawsuit in 2017 & paid $4.65 million, and Fed Ex paid the largest settlement of $228 million in 2015.

So what’s the difference between an employee and an independent contractor? Take a look at these seven specific elements:

Contact Compass CPA when you have questions about classifying your employees or independent contractors. We can also help guide you through the complete Hiring & Onboarding process, Payroll, and HR Management.

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