Employee vs. Contractor Status

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Dear Accounting Professor:

 

My firm is in the health care industry and requires a working interview with prospective employees who will directly interact with our patients. This occurs when we are considering hiring someone permanently in our office and we do not acquire them through an employment agency. The candidate for hire is brought into our office for at least one day and required to work for the full shift each day. This allows us to observe their interactions with our patients and to get feedback from those patients about their experiences. We’ve been paying these prospective employees as a contractor for years because our accountant told us that we do not need to pay them as employees as long as we pay each of them less than $600 over the course of any given tax year. Is this correct?

 

Concerned Manager

Dear Concerned:

 

Thank you for your question. No, this is not correct in my opinion. The Internal Revenue Service (IRS) is explicit as to who is an employee and who is not. In your case, your prospective employee is a common law employee for many reasons including the following:

  • your firm provides the prospective employee with a place to work,

  • your firm sets the hours for the work to take place,

  • your firm provides the tools to use when performing the work,

  • your firm acquires and schedules the patients,

  • your firm collects the payment from the patients,

  • your firm pays the related expenses incurred to perform the work,

  • your firm determines the acceptable quality of the work performed, and

  • your firm prescribes the conduct of the prospective employee.

Any position contrary to this would require that your prospective hire be obtained from a temporary employment agency (which involves the firm paying the agency according to the contract terms and that agency paying the interviewee) or have a formal written contract that is limited to a short period of time and prescribes the nature of the relationship for the working interview. For the latter, a lawyer would need to be involved who is very familiar with the employment laws in your firm’s location. If in doubt, your firm could petition the IRS via Form SS-8 to make a determination in advance that you can rely on in the event that your firm is audited by the tax authorities or experiences litigation on the matter.

Failure to correctly classify a worker as an employee could result in penalties being imposed by the IRS, a state tax authority, a labor board, or any other interested regulatory agency. It could also result in litigation by a prospective employee. The prospective employee could also file IRS Form 8919 and require your firm to pay its share of the Social Security and Medicare taxes on the wages received by that prospective employee.

You can read more about the Internal Revenue Service’s discussion of employee vs. contractor status at https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee.

Location: Sloatsburg, NY 10974, USA

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