Independent contractor vs. employee
Knowing how to properly classify your workers is important. If you misclassify an employee as a contractor, your company could be liable for employment taxes, back pay, fines and other penalties from both the federal government and one or more state agencies. Consult an attorney about the circumstances of your particular situation.
Keep in mind that depending on the employment law at issue, different tests may apply to evaluate a worker's independent contractor status. Under most laws, one key difference between employees and independent contractors is the degree of control you have over the worker. Generally speaking, a company that engages an independent contractor tells the worker what the scope of work is, but does not have control over how the contractor achieves the desired result. Check out this page on the IRS website for more information about the differences.
In contrast, an employee under the FLSA, as distinguished from a person who is engaged in a business of his or her own, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves.
Some states have "ABC tests" that focus on issues beyond degree of control, the likes of which can be seen in states including California, Connecticut, Massachusetts, and New Jersey. For a worker to be properly classified as an independent contractor under California's "ABC test," a company must demonstrate that the worker
A) is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
B) performs work that is outside the usual course of the hiring entity’s business; and
C) is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Converting a contractor to a full-time employee
If a worker’s job functions change, and as a result, the worker who was once a contractor may now be properly classified as an employee. With Justworks, it's easy to make this change in our system. Consult an attorney or your tax advisor about the circumstances of your particular situation, especially if you are concerned about how you classify workers in California or other states that apply the ABC test.
You can find the contractor by logging into your Justworks account, and clicking on their name under Manage > Contractors. From the top of their profile, you’ll see the option to ‘Change Compensation.’
You’ll have the option to select the user type and pay rate / salary (if applicable) that you’re changing this individual to. Keep in mind what you enter here may have an impact on their benefits eligibility, depending on your company’s offerings.
At this time, you’ll have to enter in an exemption status for your employee. If you need to read up on exemption statuses and the Fair Labor Standards Act, you can visit the DOL website.
Next, you’ll choose an effective date of the switch.
Once you hit ‘Continue,’ you’ll be all set. Depending on the effective date you selected, payments may be prorated for this employee. You can check their Pay Schedule under their ‘View Payments’ tab to check.
This contractor will not have to set up an additional account. Instead, they will be able to keep their same username and login, even with their user type changing.
Contractors paid over $600 in a calendar year will receive a 1099.
Justworks tracks how much your contractors are paid each calendar year through our system and will send your contractors a Form 1099-MISC form if they are paid $600 or more. In addition, we will electronically report these earnings to the IRS.
This service, along with processing unlimited payments to contractors, is included free of charge with any Justworks account.
You’ll also be able to add amounts that your company has paid outside of Justworks to a contractor’s profile, to ensure that the amount on their 1099 is correct.
How to add payments for contractors paid outside of Justworks
If you’ve paid contractors outside of Justworks, you can enter that value into their profile to make sure the amounts on their 1099 will be correct come tax filing time. You can do so from going to the Settings tab from the contractor’s profile:
From there, click the blue pencil from the Contractor Settings box. You’ll be able to enter the amount from the following screen.
That amount will be added to whatever amount you pay the contractor through Justworks on their 1099.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.