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Worker Classification Best Practices

Accurate worker classification, in our world, is a must. With rapid growth of the independent workforce we’ve seen a dramatic increase in scrutiny by the IRS and state labor agencies to ensure workers are appropriately classified. Misclassifying workers as independent contractors presents a huge risk for any enterprise.

PayReel will help ensure that all your freelance contractors are properly classified by vetting the work, the worker’s role, evaluating the risk and making a classification decision.

Is Your Independent Contractor Really Independent?

This is a deceptively complex question that’s important to answer “yes”, because the risk of your company facing an IRS or DOL audit has never been greater.

Independent Contractors (ICs) are self-employed, hired to do a specific job and receive payment only for the work performed. Unlike a regular employee, they pick their jobs and regularly move from client to client, business to business. Also referred to as freelancers, consultants and “1099’s”, they report the payments received as business income and pay self-employment taxes.

Hiring an IC is attractive to those companies looking for outside creative resources, and who want to outsource work that is not central to their main line of business. The work is project-oriented and is typically completed in a short amount of time. And, you are better able to meet budget by paying your IC as a vendor, not as an employee.

But there’s a big catch. The IRS has very strict guidelines that define true business-to-business relationships. These guidelines are meant to prevent firms from misclassifying would-be employees and thereby avoid, either knowingly or unknowingly, a bounty of state and federal taxes.

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Key things to require when working with an IC:

  • Your contractor has an established business entity, with a business name and EIN to which invoice payment is made
  • Your contractor provides services to other businesses outside your firm
  • Your IC provides certificates of insurance, including at the least, coverage for general liability insurance and workers’ comp insurance
  • You have a signed per project Agreement for Services between your company and the contractor

Take PayReel’s 5-minute worker classification self-audit

Vigilant Compliance and Audit Support

Contractor misclassification can have costly consequences. Eliminate employment risk, liabilities, and potential misclassification penalties. Take PayReel’s 5-minute worker classification self-audit to gauge whether you might be at risk of an IRS audit.
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