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Payroll Independent Contractor Classification

One of the most common concerns we hear about payroll management for independent contractors is when to classify contract workers as W-2 versus 1099 (in the US) or as T4 versus T4A (in Canada). The answer comes down to getting worker classification right up front.

That said, there is no black and white answer. So how does a company ensure they get independent contractor classification right, when “right” is open to interpretation?

It’s a question we take very seriously. Our proprietary classification tool, IC Advisor is unique among payroll providers. It removes much of the burden in surveying both the worker and the employer which is required for a proper classification, it assigns a risk level to the result by using artificial intelligence to analyze thousands of case law rulings in each state, and creates an audit defense file if the decisions and documents are needed at a moment’s notice in the future. We do this for each and every worker to confirm decisions are compliant.

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Is Your Independent Contractor Really Independent?

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This is a deceptively complex question because the risk of your company facing an 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, or contract workers, they report the payments received as business income and pay self-employment taxes.

Hiring contract workers is attractive to those companies looking for outside creative resources for example or those 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.

But there’s a big catch.

Government authorities have very strict guidelines that define true business-to-business relationships and payroll compliance. These guidelines are meant to prevent firms from misclassifying would-be employees and thereby avoiding certain related costs.

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Key things to require when working with an Independent Contractor

  • Your contractor has an established business entity, with a business name and EIN (or SIN, in Canada) to which invoice payment is made
  • Your contractor provides the appropriate protection and certificates of insurance for general liability and workers’ comp (US)
  • You understand the risks involved with working with independent contractors
  • You have a signed agreement between your company and the contractor
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Avoid Risk With Accurate Independent Contractor Classification

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 government  authorities 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.


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