Why small business owners need to know the difference

We’re excited to be in the studio today at the Atlanta Small Business Show with Director of Poulos Accounting and Consulting Andrew Poulos to help us understand what we need to know about independent contractors and employees. These are two different classifications of labor force that small businesses really need to break down and understand, otherwise they might face some challenges.

The past few years have been incredibly challenging, especially with COVID complications for small businesses. So no business owner wants to be on the IRS radar, which means their books must always be in order. However, job type misclassification could be the underlying demise of any small business. The law that determines whether a person is in fact an independent contractor is not black and white.

This law varies by interpretation. Therefore, the 20 factors you would examine are divided into three main groups with several subcategories. These main groups are Behavioral Control, Financial Control, and Party Relationship. However, the primary way companies portray behavioral control is by misclassifying an employee’s regiments of required business hours.

To help small businesses avoid misclassifications:

  • Organizations must react before becoming proactive through appropriate planning. W2 employees have a prescribed hourly rate, are paid as per payslip and are required to submit specific employment forms at the start of employment.
  • Independent contractors get paid for side jobs under the table. The misunderstanding comes from releasing the artwork to a company that may get into legal trouble. When working with contractors, the evaluation of the business interaction must result in a release form signed by the contract. This is to protect the assets of both parties.

Over the years, some businesses have failed, some businesses have thrived, and other businesses have thrived, depending on the business at the time. Andrew’s PPP program helped several companies with the content he provided.

Poulos mentions, “There are two propositions, there are fact patterns that determine whether a worker is an employee, a W2 employee who has taxes withheld and you give them a W2 year end, or if they are a subcontractor. Unfortunately, so many small businesses are wrong. A lot of people just think it’s a handshake deal that you and I agree to. But there are laws that determine whether someone is actually an independent contractor.”

Such treatment of contractors could lead the government to challenge these positions, or they could go back and reclassify them. Either way, government involvement could get very messy for everyone involved.

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