With an issue as complex as worker classification, myths and misconceptions can spread like wildfire. Well-intentioned companies have established several procedures to limit the danger of misclassification, though some continue to operate on traditions that simply aren’t legal.
Your business may have the best intentions, but what matters at the end of the day is whether or not you are compliant. We’ve rounded up eight of the most common misclassification myths and busted them to help you better understand worker classification laws in the U.S.
Myth #1: Using contractors means I have to verify Form I-9 for them and every employee who works under them.
For example, I hired a contractor who employs three people, so now I’m responsible for obtaining an I-9 from each of them.
- Form I-9 Legislation: Congress passed the Immigration Reform and Control Act (IRCA) in 1986, requiring all United States employers, regardless of size, to collect Form I-9 (employment eligibility verification) on citizens and non-citizens hired onto the payroll within the United States. Form I-9 is a document used by the United States Citizenship and Immigration Services under the Department of Homeland Security to verify and determine an employee's right to work authorization in the U.S. Except for individuals hired on or before Nov. 6, 1986, you must complete and retain a Form I-9 for every employee you engage in the U.S. However, it does not apply to freelancers.
Truth: Proper worker classification is essential because you don’t need Form I-9 to do business with a contractor. If you hire an independent contractor (IC), you never use a Form I-9.
You only need a Form W-9 from the contractor you are paying, and Form
W-9 helps you accurately report the income you will pay to them, which is reflected on Form 1099. That contractor would be responsible for completing I-9s on their personal staff or issuing them Form W-9s.
Read “What is IRS Form W-9, and why is it important in 2022?” for more information.
Myth #2: My industry has always classified its workers as independent contractors, so it must be okay to continue doing so.
Truth: Misclassification under the Fair Labor Standards Act (FLSA) is not justified by common industry practice. If the work falls under the law’s definition of a full-time employee, they will be deemed an employee.
Just because an industry has always classified certain workers as independent contractors doesn't mean that it is the correct way to proceed.
Worksome Classify recommends and automates the worker classification process so your company can continue to work with independent contractors and employees on a fully-compliant basis. Even if you’ve hired
a legitimate independent contractor for a long time, the nature of your working relationship may have altered, and that can change their legal classification from freelance to employee.
For more information, read “Legal Worker Classification: Employee
Myth #3: The IRS doesn’t care if I classify my workers as freelancers or put them on the payroll as long as I pay my individual taxes.
Truth: The IRS cares about worker classification because a worker’s legal status dictates which taxes apply to their earnings. Whether you hire a person full-time or part-time, it matters to the IRS because you are responsible for withholding income taxes on payroll employees.
Whoever hires a freelancer becomes responsible for ensuring that a W-9 is on file so that the freelancer can be held accountable for paying their own taxes.
Worksome Classify is a tool that allows you to classify employees in-house using a pre-defined questionnaire all within the Worksome platform — this aids in quickly and accurately recommending the worker’s legal classification.
Specific benefits and protections are afforded to ICs and employees, and you should not deprive them of these individual rights.
Myth #4: I haven’t been audited, and never will be because I don’t work in high-risk industries or hire a high volume of workers.
Therefore, worker classification isn’t something I need to deal with.
Truth: Several things could trigger an audit revealing your worker classification practices.
- Companies can get audited for worker classification issues if an IC you no longer work with struggles to land their next gig and puts in a claim for unemployment insurance that identifies you as the former employer of record.
- You can be audited for worker classification if the IC suffers an on-the-job injury and submits a worker’s compensation claim that identifies you as their former “boss” and employer of record.
- If a long-term freelancer feels they deserve a raise and submits a complaint to the Department of Labor’s Wage and Hour Division, you could be audited.
- If a contingent worker files their taxes and you are the only employer listed on Form 1099, especially if it appears to be a full-time income, it can trigger an audit.
Just because you issue a particular tax form to a worker doesn’t mean that designation was legally accurate. It doesn’t matter if you work in high-risk industries or don’t hire many people.
Myth #5: Independent contractors are not eligible for unemployment insurance.
Truth: A business entity may regard a worker as self-employed, but each state’s unemployment insurance board has the authority to determine whether or not a worker is an employee under its own rules.
The unemployment insurance board can determine that a freelancer may be eligible for unemployment benefits despite their employer’s categorization. Accurate worker classifications can give you a clearer picture of the types of workers you are employing and your responsibilities to them.
Myth #6: I pay my workers infrequently, under the table, or cut personal checks and try not to act like a boss, so technically, they are neither employees nor freelancers.
They also work informally, and therefore, an employer-employee relationship doesn’t exist, and my so-called freelance workers aren’t what you would consider kosher either. There was no set process when I engaged these people, and I'm not sure I'm required to classify them.
Truth: The worker's and employer's real-life working conditions influence a worker’s classification. Employers who leave employees off of the payroll mistakenly believe that they will be overlooked, and in fact, these practices can be seen as tax evasion.
The FLSA requires employers to retain records for their employees, including classification, identification, work hours, and any earned compensation. On the other hand, Freelancers should be providing you with a valid W-9 so that you can allow them to pay taxes on their earnings. If you don’t, you could be responsible for paying taxes on their behalf.
Myth #7: Teleworkers and off-site remote workers aren’t eligible for worker classification. Their classification is remote!
Truth: The location of a worker’s job performance has little bearing on whether or not you need to classify them.
Remote workers make Worksome Classify an even more valuable asset.
It factors in multiple tests for worker classification and saves you from struggling to make sense of the different determinations.
Working away from a job site does not automatically qualify you as an independent contractor, and in contrast, working on-site does not imply that you are an employee. Employees and contractors, after all, can work on-site or from home.
Many factors help determine classification, including whether the employer has the right to tell the employee what, how, when, and where to do the job.
Myth #8: They are ICs because they signed an IC agreement.
Truth: In most cases, you do not become an IC by signing an agreement.
Some employers believe that getting people to sign IC agreements qualifies them as contractors, which is only part of the truth. Contract language that defines the worker as an independent contractor may influence the outcome, but in most cases is not enough by itself. The working relationship must still pass the relevant state and federal worker classification test requirements.
See how Worksome can rectify some of the myths that might be keeping you at risk.