How to classify construction workers
As a business owner, it’s critical that you understand how to classify construction workers you hire as employees or independent contractors. Each of these worker classifications has different tax liabilities, procedures for tax withholding and tax payment, and other documentation. Employers who fail to understand and comply can face serious and expensive consequences, including payment of back taxes and/or benefits plus penalties.
How to classify workers
As a general rule, an employee is anyone who performs services for you in which you control what the worker does and how it’s done. That ‘control’ includes determining work hours, compensation and benefits; reimbursing for business related expenses; establishing time-off policies; setting dress codes; and providing tools and equipment. This applies to both full and part-time employees.
Conversely, you can only classify construction workers as independent contractors if you only direct the results of the work done – not the means or methods used to accomplish the work.
For workers you determine are employees, you are required to:
- Withhold taxes – Employers are responsible for the withholding and timely remittance of federal, state and local income taxes, and FICA taxes from wages paid to employees.
- Pay payroll taxes – Employers must pay a share of payroll taxes, such as FICA and federal unemployment insurance.
- Observe labor laws – Employers must comply with labor laws on workers compensation, minimum wage, proper working conditions laws and other requirements to protect employees.
- Pay employee benefits – Typically employees receive benefits, such as paid vacation time and holidays, health insurance, and pension and retirement savings programs made available by the employer.
- Report wages and taxes paid to the IRS.
If your worker is an independent contractor, you should not withhold or pay federal, state or local taxes from money paid for services rendered. In addition, you are not required to apply labor laws or provide benefits. When you hire an independent contractor, outside vendor or subcontractor, you must have the worker complete a Form W-9, a request for taxpayer identification number, also referred to as a (TIN or FEIN number).
At the end of the year, you should issue a Form 1099 to all independent contractors – a copy goes to the IRS – with the total payments made for services rendered. (This only applies to payments of $600 or more.) Once the 1099 is filed with the IRS, the employer is relieved of any tax consequences or penalties if the independent contractor fails to pay taxes. If you do not send a Form 1099, and the contractor doesn’t pay taxes, you are liable for the unpaid taxes and any penalties.[tip id=”5670″]
The length of time workers works for you does not impact the decision of how to classify construction workers. It’s the relationship between the employer and worker that establishes the proper classification, not the amount of time worked.
Having a signed contract that says a worker is an independent contractor and is responsible for payment of taxes, does not make it true. A contract may establish intent, but it doesn’t supersede the law. Here too, it’s the relationship between the employer and employee that forms the basis of the classification.
As companies use more independent contractors, the amount of taxes employers pay are decreasing. In response, the IRS has placed new emphasis on identifying employers who misclassify employees. According to the IRS, more that 90 percent of the firms they audit have improperly classified independent contractors. Those companies:
- Are liable for back taxes and any penalties and fines for late payment.
- Are liable for back pay, including overtime pay.
- May have to reimburse the worker for unpaid benefits, including health insurance and paid vacation, holidays and sick leave.
- May have to pay claims for unemployment benefits.
- Will have to pay attorney costs for related litigation
- Could receive criminal sanctions, including fines and imprisonment.
—By Bruce Webb