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There is much confusion today about who is an employee and who is an Independent Contractor.
Yes, the current laws are vague, and they have been vague, especially in NJ, for decades. So the current hysteria and fears are not based in any significant change to legislation and rules.
Don’t let this hysteria have you disengage from your valued Independent Contractors!
If you are truly an independent business, it has always been highly unlikely NJ will try to reclassify you as a W2 employee when you are clearly an Independent Contractor.
Most times it is very clear if a relationship is one of employer and employee, or a business to business Independent Contractor one.
That being said, there are many employees who are being paid as an Independent Contractor when they shouldn’t be. Those people are the focus of these new proposed rules, and they will help many people who are adversely impacted by being misclassified as businesses when they are truly employees.
There are certain things that can help prove the person you are paying is NOT an employee, but is an Independent Contractor.
So, by the same token, there are ways to help prove you are an Independent Contractor and not an employee.
Some important notes:
Working on the premises of your client does not matter if you are a legitimate Independent Contractor. Valid Independent Contractors work on site, even when technically doing the same work, but they are never employees.
Forming an LLC or Corp does not matter.
In practice, try to institute as many of these procedures shown below. Employees have NONE of these.
Multiple Clients – Independent Contractors have multiple clients. This does not have to be at the same time. Many Independent Contractors work for one client at a time then move on to the next. If you are working for the same client long term, regardless of your business attributes, you may be at severe risk of being classified as an employee, regardless of where the work is performed.
A good example of this are Uber and Lyft drivers. They are not being paid by their passengers. They are paid by Uber or Lyft so that is who they work for. In my opinion, Uber & Lyft drivers could possibly be classified as employees as they don’t have multiple clients for their driving / livery activity. Independent Contractors get paid by multiple clients, never just one over time. Uber & Lyft drivers have only one source of income for that activity.
Business Cards & Websites – Independent Contractors have these, employees do not.
Marketing – Businesses are actively marketing their services in search of new clients.
IRS Form W9 – Link Here https://www.irs.gov/pub/irs-pdf/fw9.pdf
Independent Contractors complete a W9 and provide these to those businesses hiring them. This form will show your business name and Federal ID Number. That information will be used to complete a 1099-NEC (formerly 1099-MISC) at year end and will reflect the total amount you were paid during the entire year.
Independent Contractors – Make sure you provide a completed W9 to every person you have subcontracted with.
Businesses – Make sure to get a completed W9 from every Independent Contractor you are paying.
1099-NEC new for 2020! Replaces the 1099MISC still used in 2019.
Businesses, be sure to issue 1099s to all Independent Contractors you have paid more than $600.00.
Independent Contractors, demand that you receive a 1099 at year end.
Contracts – Businesses have contracts or engagement letters between them detailing the work to be performed. These are good evidence that your work relationship is always temporary, and not full time employment. Consult with an attorney about specific wording, but it is always good to see wording where the parties acknowledge the Independent Contractor is never working exclusively for the company engaging them. Employees work under the assumption that their employment is open ended. Independent Contractors, through contracts, make it known their work is temporary in nature and terminates at a certain point.
Invoices – Independent Contractors invoice their clients. Employees are on a fixed salary or provide time sheets to be paid by the hour. Independent Contractors can be hourly, but these hours are detailed on invoices on their letterhead. Employees never provide invoices to get paid. Always demand invoices from your Independent Contractors, and always give them if you are an Independent Contractor.
Detailed Business Records – Independent Contractors maintain accounting books and records, calendars, client files, etc. And they file tax returns for their business. A Schedule C for a sole proprietor or sole member LLC, for example.
Insurance – Businesses carry business insurance, employees do not. All Independent Contractors should have at least a small BOP (Business Owner’s Policy).
Home Office – A home office is just as legitimate as a rented commercial space. It does not in anyway reduce your qualifying as an Independent Contractor. Also, there is much misinformation about taking the Home Office deduction. It does NOT increase your risk of audit, so take it if you have a valid home office. Also, it does NOT reduce the basis of your home unless you have taken depreciation as part of the home office deduction.
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Chris Whalen, CPA
(732) 673-0510
81 Oak Hill Road
Red Bank, NJ 07701
www.chriswhalencpa.com
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