Legal worker classification: employee vs. contractor

Worksome helps businesses work more efficiently by reducing the hiring process to minutes.

March 7, 2024

Hiring full-time workers can take several weeks to months, diminishing the overall competitive advantage in a declining talent pool. Respectively, managing freelancers can be equally frustrating without accurate and efficient employee classification and management tools.

Worksome helps businesses work more efficiently by reducing the hiring process to minutes and facilitating faster project completion. Even still, there remains essential information you should know about worker classification.

The American worker is known under various titles, including contractor, freelancer, consultant, independent talent professional, giggster, statutory employee, non-employee, and other W-2 generalizations. The primary differentiator is that an independent contractor would receive a 1099 tax form (Form 1099-NEC, for example) for federal and state tax filing purposes and not Form W-2.

Understanding legal job classification standards

Understanding the Internal Revenue Services (IRS guidelines) for Form 1099 qualifications can help companies determine the type of worker they want to hire in compliance with legal tax standards. The working relationship differs between those classified as independent professionals (1099 form recipient) and W-2 workers. Three categories make up IRS considerations, including behavioral, financial, and relational indicators to determine worker classification.

Questions that would help determine worker classification:  

  • Is there a written contract in place?
  • Are employee benefits offered like pension plans, insurance, or paid vacation?
  • Will the relationship continue beyond the scope of a single project?
  • Is the work being performed an integral aspect of business operations or functionality?
  • Does the company control or have the right to control how the worker does their job?
  • Are business expenses reimbursed?
  • Who provides the tools/supplies required to complete the commissioned work?
  • Is training provided or required for the work to be done?

Unfortunately, these questions don’t predict black and white results.
To shed light on these considerations, as mentioned above, the IRS offers
a classification determination process using Form SS-8 Request for Determination of Worker Status, which can take at least six months to complete - the same timeline goes for outdated managed service providers.

Worksome technology takes only minutes to recommend worker classification using Worksome Classify.

W-2 or 1099?

Business owners withhold payroll taxes, social security, medicare, pay benefits, and health insurance to W-2 employees, who are valuable assets to any entity. Likewise, a highly-skilled 1099-contractor can be cost-effective to employ for short-term or long-term projects because they pay their own income taxes.

With a freelance management tool, the cost of finding, paying, and managing freelancers or remote teams doesn’t have to be expensive or frustrating. Worksome tools aren't only for managing freelancers because we can also be a perfect solution for directing your full-time or part-time workforce.

Worksome is the only company to identify, engage, and make recommendations for worker classification in minutes, not months, under our Worksome Classify feature. It is the most simple, compliant, and efficient way to do US classification, but ultimately, the employer decides. The worker designation dictates whether a W-2 or Form 1099 will be issued.

For more information read, “The 1099 & W-2 Employee Payroll and Tax Reporting.”

Helping the human resources department with a robust freelance management system

Worksome tech frees up your internal employees to focus on actual work as the global working class moves steadily toward an online gig economy. HR worker classification recommendations might not be accurate enough to classify your workforce at scale.

Remember that the answer to some classification questions might point to one designation while others can equally point to another. We enable human resources, legal, and other departments to spend less time on these important tasks.

Pros and cons of workers classified as an employee vs. freelance

Suppose the worker is classified as an employee. In that case, they are entitled to minimum wage, overtime, company paid taxes and usually receive employee benefits, tools for work, and reimbursement for
business-related expenses.  

A good employee is valuable but more expensive to retain and is subject to company policies and intricate stipulations. Independent contractors have economic freedom and can decide how and when they work, bearing the financial risks and benefits typical of the self-employed, making this classification financially attractive to businesses.

Penalties for misclassifying employees

Risks occur for businesses that misclassify workers, like hefty penalties
from the IRS, back-taxes, and worker compensation claims.

Proper Characterization of Workers

Worksome can help you avoid violations of federal law, fines, penalties, class-action lawsuits, back-pay owed to misclassified workers, and reputation damage, to name a few.

Our FMS reduces compliance risks and can improve the relationship between cost, time, and income for your business.

The US crackdown on committing tax fraud

The Biden administration is putting the squeeze on tax cheats after losing millions in tax revenue to misclassification. As a result, the current administration has instructed “the Department of Labor to continue to prioritize action to prevent and remedy the misclassification of workers as independent contractors, through rigorous enforcement, partnerships with other relevant federal and state agencies (p.29),” including the IRS and DOL/Wage and Hour Division.

The National Labor Relations Board also announced its coordinated efforts with the DOL/WHD and IRS to maximize the enforcement of Biden’s tax compliance agenda. They will enhance their information sharing to protect workers from misclassification through coordinated investigations, enforcement, and training outreach.

The federal and state government will ultimately demand back-pay on taxes and interest for employee wages, including FICA taxes, not withheld initially. Beware that failure to make payments can result in additional fines or criminal punishment.

A tool for solving the worker classification dilemma

Worksome helps clarify worker designation by looking at the entire relationship and considering the extent of the right to direct the worker. Understanding how to classify workers can help your organization stay
on the good side of the law when filing taxes and paying people.

Worksome enables your business to remain agile, offering global management tools for an ever-growing contingent workforce. Set up
a personalized demo today to see how you can quickly classify your workforce and streamline every aspect of freelancer management, contracts, payments, and billing here.