And the books turn over.
As we step over the threshold into 2022, we’re all staring at much lower numbers in our P/L’s. It’s a new slate, and the possibilities are endless.
What will you do in 2022? That’s the question of the hour … and it has much less to do with outside circumstances than it does with YOU. Your choices will make all the difference this year — not government policies, congress, sloppy vendors, or recalcitrant employees.
And we’re in your corner:
And one of the things for which we are in your corner is to keep you and your Skagit County business from getting in hot water.
Because according to the various sources I’m plugged into, the Department of Labor and the IRS will be making worker classification a big focus of this year — from audits and compliance measures to outreach and PR.
All of the virtual and home-based work that is flying around is leading to some business chicanery when it comes to deeming employees as independent contractors as a tax dodge.
So, I thought I’d take some time to help you get this straight.
Yes, yes … I know — this is a perfect topic to “kick off the new year with a bang.” Ha!
But wouldn’t you agree that if you’re gonna get this right, NOW is the time to do so?
Worker Classification Steps for Skagit County Businesses in 2022
“It ain’t what they call you, it’s what you answer to.” ― W.C. Fields.
If you had to guess (and you do), would you say you have “employees” or “independent contractors”?
This used to be a pretty casual distinction Skagit County business owners like us never had to think about. No longer. Now, a business owner has to recognize what the IRS says is the difference – or there could be trouble.
Here’s what you need to know…
Worker Classification Step #1 – What’s in a name?
Your tax situation is different for each type of worker. So, what’s the difference?
An “employee” is generally any worker who performs services for your Skagit County business if your business can control what will be done and how it will be done. In other words, you control the details of how that worker does their job for you. Usually, they’re paid a salary or wages and may receive benefits. You withhold employment taxes from their paycheck.
You have an “independent contractor” on your hands if your worker is in an independent trade, business, or profession that they offer to the rest of the public and that they happen to be doing for you right now. This might include doctors, dentists, veterinarians, lawyers, accountants, construction contractors, and so on. You don’t control the work, only the result of the work. You usually pay them by the job and you withhold no taxes, and they get no benefits.
Seems pretty clear. Except it isn’t always.
Worker Classification Step #2 – Who’s who?
Whether a worker is an independent contractor or an employee depends a lot on the relationship between the worker and your small business. You need to look at three factors that the taxman is beginning to take more seriously:
Behavioral control. Again, do you control or have the right to control what the worker does and how the worker does the job?
Financial control. Do you direct or control the financial and business aspects of the worker’s job? That is, how the worker gets paid, if expenses get reimbursed, who provides the tools or supplies, and so on.
The relationship. Are there written contracts or employee-type benefits such as a pension plan, insurance, or vacation pay? Is this worker’s work a key aspect of the business?
Let’s say you hire a plumber to fix a leak in your office. They show up in their own truck with their own tools when they can, and when they’re done you pay them. That’s an independent contractor.
Then let’s say you live in an area where everybody has lousy pipes and you’d like to get into the repair business. You contact that plumber again for jobs – except they are jobs you solicit. You provide the tools, the truck, maybe some health insurance, and you tell the plumber where the job is. The check is sent to you, and you pay the plumber a wage or salary out of that money. That’s an employee.
Worker Classification Step #3 – Risky business
So what’s the worst that can happen if you get it wrong – or if you do what’s been done for years in some industries and call a contractor a “worker” and just move on?
Yes, it is tempting to save bucks on all the perks that come with an employee, all the while getting away with telling somebody you tell an independent contractor how and when exactly to do the job.
(And yes, you’re right – when businesses cheat in the Game of Employee/Contractor, they usually try to pass employees off as independent contractors as far as taxes go).
But misclassifying a worker as an independent contractor leaves your door wide open to potentially being liable for employment taxes for that worker (such as Social Security and Medicare taxes, as well as unemployment taxes). That is a huge no-no and could be major trouble for your business.
Why? The big tax guys are paying a lot more attention to this issue, particularly states like California and, just recently, the National Labor Relations Board.
If you get caught misclassifying employees to skirt taxes, the feds can smack you with serious, escalating penalties based on wages and the employment taxes that you failed to withhold.
Then there’s interest on missed taxes. Then the state can get involved… It simply isn’t worth the risk.
Worker Classification Step #4 – Coming clean
If you’re concerned that you’ve already stepped into something smelly concerning this issue, all isn’t lost. The IRS has something called the Voluntary Classification Settlement Program that gives Skagit County taxpayers like you and your small business the chance to reclassify workers as employees for future tax periods.
There are eligibility requirements to this program and other details, but it still might beat rolling the dice – especially as the IRS shines a brighter light on this issue.
This is just an overview of an increasingly complex part of running a small business. If we can help, don’t hesitate to reach out to us. We’re here for you.
Stay safe out there.
In your corner,
Padgett & Padgett, PLLC CPA