Classifying independent contractors can be very complex, but it can also be costly if done incorrectly. The IRS can fine employers who misclassify employees for each Form W-2 an employer fails to file on each employee. Fines can include 1.5% of wages, 40% of the FICA taxes that were not withheld from the employee, and 100% of the matching FICA taxes the employer paid. These penalties can be damaging for an employer.
On January 6, 2021, the Department of Labor (DOL) updated the rules for classifying employees vs. independent contractors under the Fair Labor Standards Act (FLSA). These rules go into effect on March 8, 2021.
Here are the highlights of the new rule
The Department of Labor reaffirms the “economic reality” test. This test is used to determine whether or not a person works for themselves or are economically dependent on the employer for work.
The final rule identifies two “core factors” for determining whether or not someone works for themselves or is dependent on an employer for work. These factors are a worker’s degree of control over the work and their opportunity for profits or losses.
If the two core factors do not point in the same direction, 3 other factors can be used to make a classification determination. These factors include the skill required to perform the work, how permanent the work is with the employer, and whether the work is an integral part of a unit of production.
For more information about this topic visit the Department of Labor website.
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