Employee or contractor: What’s the difference?
When it comes to your staff, check with an expert
In fields such as home health care, it’s not uncommon to hire people on a part-time basis, dependent on the number of days they will work or even the number of patients or cases they will handle.
While your intentions are straightforward enough, the waters can become muddied when it comes time to fill out your employee’s withholding forms. At that point, the determination must be made whether or not someone is an independent contractor or an employee, a fact that depends on your intent.
According to John C. Gilliland II, JD, an attorney who specializes in home health care issues and founder of Gilliland & Associates in Covington, KY, there is no simple, one-size-fits-all definition.
"The problem of whether someone is an independent contractor or an employee depends on the purpose for which you are trying to determine. For instance, there is a set of qualifications to be met for the IRS, then there is one if you’re talking about minimum wage and overtime pay. There’s another for workers’ compensation as well."
According to Gilliland, the most common set of circumstances is for the IRS. There, he explains, the common-law test applies. (See related article, p. 17.)
"This test has been developed by the courts over hundreds of years. If you took all the various purposes, the common-law test has boiled them down into the most common, and hence the name," he explains. While this set of guidelines can certainly prove helpful, Gilliland points out that there "is no single controlling factor."
An employee is under employer’s control
Confused? Well, it’s not surprising. Still, there are a few general guidelines to follow. The first, says Gilliland, is "an employee is subject to an employer’s direction who has control over the manner and means by which the work is performed. In contrast, with an independent contractor, the employer is looking only at the outcome and not how it is achieved.
"In home care, very, very few workers are independent contractors, in part because the IRS made a ruling that held all home health agency workers to be employees because Medicare requires that all home health care workers have supervision. That said, there are still some safe havens where if certain conditions are met, you don’t have to withhold taxes from that person’s paycheck."
As a general rule, the only place "you might have a shot at someone being an independent contractor is with therapists in private practice and, in some states, medical social workers. When it comes to home health nurses and aides," says Gilliland, "I would have trouble believing they would be."
Gilliland’s recommendation: "Obtain legal advice. If you’re treating anyone as an independent contractor and haven’t had this reviewed by a knowledgeable advisor, it’s dangerous."
He advises seeking out a reputable employment labor attorney; while there are accountants who are very knowledgeable about the IRS common-law test, that’s usually where their knowledge stops. "The law isn’t a part of their training, and this really boils down to more of a legal than a tax question."
Severe penalties could apply
The consequences of "misdiagnosing" an employee can be severe. If, for example, you fail to withhold taxes, the IRS will hit you with financial penalties plus interest — even if the independent contractors have been paying taxes on their own. Penalties are also levied by OSHA and any one of the other governing bodies dealing with labor and employment.
"Depending on the circumstances," notes Gilliland, "these penalties could put you out of business."
Still, there are some who fail to heed solid advice because they don’t want to pay for the "employee’s" Social Security or benefits. "That’s something you can do if you wish, but calling them independent contractors isn’t the way," says Gilliland. "What you call someone is virtually meaningless. Calling them an independent contractor doesn’t make them one. In this case, the simple, quick fix will come back to bite them."
• John C. Gilliland, II, JD, Gilliland and Associates, 211 Grandview Drive, Suite 205, Covington, KY 41017. Telephone: (606) 344-8515.
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