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Employees vs. Sub-Contractors in Indiana | W-2 vs 1099-Misc

Employees vs. Sub-Contractors in Indiana | W-2 vs 1099-Misc

Whether you are classified as an employee or a sub-contractor may have significant legal and tax obligations. Many people don’t realize that there’s a difference between employees and sub-contractors in Indiana. However, sub-contractors or independent contractors as they are often referred to, don’t receive the same legal protections from the government and don’t have the same rights in the event that you are not paid for your work. Whether you’re an employee or a sub-contractor, you need to spend some time studying the rules and regulations regarding your position and become aware of your rights. If you’re a business owner, it’s even more crucial to distinguish between the two because you have some tax liabilities and obligations.

The Difference Between Employees and Sub-Contractors

Both employees and independent-contractors provide services to you and both get paid for their services. That’s the only commonality between the two types of associates. The IRS states that you can distinguish between employees and independent contractors based on three different categories:

Behavioral Control – Who determines how much control you have over how the job is done. Is it you or is it your boss? Does the employer provide instructions, methodology, training in that methodology, and directions on how and when to carry out the job. If so, this looks and smells like an employer/employee relationship. However, if you are independent, can control the scope of your own work, then your job has the characteristics of an independent contractor.

Financial Control – Who controls how you are paid?  Do you bid for the work and then submit a bill or invoice?  Or, are you paid an hourly wage?  In some industries it may be more difficult to distinguish between independent contractors and employees.  Who controls how and when the worker is paid, how they’re reimbursed for equipment used and services rendered, and who bears the profits and loss, etc. An employee can fully expect the employer to provide all necessary tools and equipment to perform their job, and to reimburse them for wear and tear of the equipment they might bring to the job. For example, an employee drives to different locations in their personal car to perform their job might expect to be reimbursed by the employer for the fuel, maintenance and repairs. However, and independent contractor is considered self-employed and must pay all of these expenses out of their pocket. These expenses aren’t considered the business owner’s concern. Think of an independent contractor as a small business owner.

Relationship between the Parties – The most significant difference between an employee and an independent contractor is their relationship with the employer. Subcontractors should have written contracts for every job they do or for a fixed duration. Employees, on the other hand, typically do not have contracts.  They are employed “at-will” but they receive regular pay checks, and have taxes deducted from their pay.  Employees also may have benefits associated with their employment such as health insurance, paid time off, and reimbursements for expenses

Why Is the Classification Between Employee & Independent Contractor Important?

This classification is very important because it impacts how you file your taxes. Here’s a brief description of your obligations based on whether you’re an employer, employee or a sub-contractor:

Employee – If you’re an employee, your employer is responsible for paying your social security and employment tax obligations by withholding the amount from your wages or salary. In return, you won’t need to concern yourself about the obligatory payments to the government.

Independent Contractor – If you’re a contractor, you’re responsible for your own self-employment taxes, which must be paid quarterly.

Employer – As an employer, the distinction is very important because you’ll need to pay the taxes, social security, and insurance on your employee’s behalf, and you will issue them a Form W-2 at the end of each year. You can deduct the needed amount from your employee’s salary and compensation. You will also have to pay state taxes and federal unemployment taxes on behalf of your employees. If you have independent contractors working for you, you are not required to withhold payroll taxes, and you will issue a Form 1099 at the end of the year.

Because it seems simpler to hire independent contractors, employers often misclassify their employees as such in an effort to avoid paying payroll taxes, etc.  If you are found to be misclassifying your employees as independent contractors, you may be subject to fines and penalties issue by the US or Indiana Department of Labor.

Reporting the Earnings of Employees & Independent Contractors

As a business owner, you need to report every employee and independent contractor you have on hand. You also need to make sure you have classified them correctly. The Department of Labor is very stringent on the difference between an independent contractor and an employee. In fact, they have cracked down on entire industries that try to misclassify employees as independent contractors.  You are also required to pay employees overtime for every hour over 40 hours in a given week. Overtime is 1.5 times the amount of your regular hourly rate. This is another reason why employers seek to classify their workers as independent contractors.  That is, they are trying to avoid the overtime requirements of the Fair Labor Standards Act.

What Should You Keep in Mind?

There are significant penalties for employer who refuse to pay their employees’ wages.  In Indiana, this can be up to 2 times the amount of wages, plus attorney’s fees.  Failure to pay an independent contractor does not have these penalties.  Rather, this is just a simple breach of contract claim.  If you are an independent contractor, it is important to have a written contract. As part of the terms of that agreement, specify that you can seek attorney’s fees if you are not paid.  Without such a clause, it may be difficult, and expensive to find an attorney to take your case.

If you believe your employer has misclassified you as an independent contractor, you should contact an attorney immediately. It may be that you want to report the company to the Department of Labor.

For more information on the misclassification of employees, you can seek guidance from the US Department of Labor.  https://www.dol.gov/agencies/whd/flsa/misclassification

 

My Employer is not Paying Me Overtime

My Employer is not Paying Me Overtime

My Employer is not Paying OvertimeA common question that our clients ask us is, “Should my employer be paying me for overtime?”  Both Indiana and Federal Law require the payment of overtime wages unless an employee is exempt.  Some examples of exempt employees include outside salespeople, teachers, executive, administrative or professional employees, certain farm workers, and employees in certain computer-related occupations.  The vast majority of hourly workers are entitled to receive overtime for every hour, over 40 hours, worked in a given week.  Current Federal Minimum Wage is $7.25 per hour.  Therefore, even if you are paid a salary, your average hourly wage, based on a 40 hour week, must equal $7.25/hr.  If you are working more than 40 hours per week, your employer should be paying you time and a half for every hour over 40 worked during the week. A common misconception among employers is that all salaried employees are exempt from the overtime requirements.  This is simply not true.

Another area where we often see abuses in wage and hour laws is in the case of tipped employees. Tipped employees are individuals engaged in occupations in which they customarily and regularly receive more than $30 a month in tips. The employer may consider tips as part of wages, but the employer must pay at least $2.13 an hour in direct wages.

The employer who elects to use the tip credit provision must inform the employee in advance and must be able to show that the employee receives at least the applicable minimum wage (see above) when direct wages and the tip credit allowance are combined. If an employee’s tips combined with the employer’s direct wages of at least $2.13 an hour do not equal the minimum hourly wage, the employer must make up the difference. Also, employees must retain all of their tips, except to the extent that they participate in a valid tip pooling or sharing arrangement.

Wages required by the FLSA are due on the regular payday for the pay period covered. Deductions made from wages for such items as cash or merchandise shortages, employer-required uniforms, and tools of the trade, are not legal to the extent that they reduce the wages of employees below the minimum rate required by the FLSA or reduce the amount of overtime pay due under the FLSA.

The United States Department of Labor’s Wage and Hour Division (WHD) is responsible for enforcing some of the nation’s most comprehensive federal labor laws on topics including the minimum wage, overtime pay, record keeping, child labor, family and medical leave, migrant and seasonal worker protections, lie detector tests, worker protections in certain temporary guest worker programs, and the prevailing wages for government-funded service and construction contracts. Collectively, these laws cover most private, state, and local government employment, and protect over 135 million workers in more than 7.3 million establishments nationwide. The Department of Labor has even created an app for employees to keep track of their time to determine if they may be entitled to overtime.

On June 30th, the DOL unveiled a proposed rule that would broaden federal overtime pay regulations to cover nearly 5 million more people and raise the minimum salary threshold required to qualify for the Fair Labor Standards Act’s “white collar” exemption to $50,440 per year in 2016, up from the current $23,660.

Employment law attorneys anticipate significant increases in the number of employees who will be entitled to overtime pay. Thus, even if you are currently considered an exempt employee, you may no longer be considered exempt under the new proposed rules.


If you have questions or concerns about the way your employer administers overtime pay or other employee benefits, please contact the Indianapolis Employment Law Attorneys at Goodin Abernathy, LLP.