The traditional 9-to-5 workday will soon be relegated to the pile of 20th-century relics joining iPods, DVD players, and those butterfly hairclips we’re hoping don’t come back around. According to a recent UpWork report, nearly half of Gen Z workers (46%) are choosing the freedom and hustle of contract work and many industries are now reliant on freelancers to function. Jobs in journalism, marketing, accounting, design, sales, and product development are being hired for on short-term bases so that businesses can be more agile and bring in highly-skilled workers only when they need them. And freelancers can work when and where it suits them, choose different projects of interest, and have more room to negotiate their income. However, for many of us, this way of working is still relatively new, which means that the line between independent contractor and traditional employee sometimes gets blurred.
It can be incredibly arduous to get a business off the ground, and many new entrepreneurs see freelancers as an opportunity to have a full-time in-house resource to support them without the financial investment of benefits and taxes, and the headache of setting up proper human resources procedures. But it can actually result in hefty fines when contract workers, who have swapped benefits and security for flexibility and autonomy, feel exploited by the constraints of an employment relationship under the guise of freelance work.
What is the distinction between independent contractors and employees?
If someone’s business is themselves and their ideas, they should be able to draw a clear line with respects to their involvement with your company. Federal and state agencies have their own tests for determining whether someone is an independent contractor, although there are a few general guidelines.
If you hire a freelancer, they should:
– Set their own schedule
– Set or negotiate their rate of pay
– Provide all of their own equipment, tools, and supplies
– Be able to offer their services to other businesses
– Be free to refuse other projects at your company
– Work without supervision, direction or control in the performance of their duties
– Have their own business insurance
– Be free to hire their own subcontractor
– Be using their own company’s email address
– Invoice you for payment
– Not need training, job performance reviews or require permission for absences
Read more about the labor laws in NY State.
What are the fines for misclassifying a freelance worker as an employee?
If you do hire a freelancer and start to fall into the model of a traditional employer-employee relationship–setting the hours of work, asking for reports, supervising them, requiring their attendance at training sessions–you risk having to pay penalties if it comes to the attention of the IRS that you’ve misclassified them.
You could have to pay:
– $50 for each Form W-2 you didn’t file
– 1.5% of the wages, plus 40% of the FICA taxes (Social Security and Medicare) that weren’t withheld from the employee
– 100% of the FICA taxes you should’ve paid per employee
– A Failure to Pay Taxes penalty equal to 0.5% of the unpaid tax liability for each month up to 25% of the total tax liability.
If the IRS suspects that your misconduct was intentional, it can impose additional fines and penalties. In extreme cases, the IRS can exact criminal penalties of up to $1,000 per worker and one year in prison.
Source: Justworks, Keeping Compliant
Drawing up an agreement between your company and a freelancer
If you’re hiring in freelance help, it might be prudent to write up an Independent Contractor Agreement, which sets forth the terms of the relationship and doesn’t leave any room for confusion. The agreement could be a short addendum to your working contract which should detail deliverables, timelines, your insurance requirements, results, and a precise end date. It’s also vital to keep all of the invoices and any other documentation that defines your working relationship and the freelancer’s status as an independent business. Finally, it’s crucial that managers and other employees at your company know the terms of the agreement so that they don’t start including the independent contractor in internal meetings, away days and training opportunities.
It might be prudent to write up an Independent Contractor Agreement, which sets forth the terms of the relationship and doesn’t leave any room for confusion.BACK TO FOUNDATION