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 The Perils of Converting Employees to Independent Contractors

Posted on November 27th, 2021

Business Lawyer Montana

An independent contractor is a self-employed person who charges fees to provide services for a company while remaining a separate entity. An employee is someone whom an employer hires to work for the company, dictating when and how the employee must do his or her job. Employees have rights and benefits that independent contractors cannot claim.

There may be a legitimate reason to convert an employee to an independent contractor. Sometimes there is a genuine change to the relationship that a company has with an employee. However, it is not something that you should do casually because there can be significant consequences.

It Can Cost You More Than You Think

Many people want to convert employees to independent contractors in the interest of saving money. Perhaps you need to downsize but you want to keep your employees in similar roles. Reclassification may seem like a way to save money while maintaining your workforce.

However, you can’t just suddenly declare someone an independent contractor. If it was someone you initially hired as an employee, and the employment wasn’t understood to be temporary in the first place, you first need to terminate him or her. The former employee may now be eligible for unemployment compensation, and you may have to pay out accrued vacation time or unused sick days. These can all add up, especially if the employee worked with you for some time.

It May Trigger an Audit

To convert someone from an employee to an independent contractor is to provide them with two different tax forms. Independent contractors receive 1099 forms from the companies they work for, while employees receive W-2s. If you report one of each document for the same person during the same tax year, the IRS may suspect something inappropriate is going on and conduct an audit. During the audit, you must provide a good reason for reclassifying the employee.

It May Be Considered Misclassification

The difference between employees and independent contractors isn’t just in how you pay them or what you call them. The government recognizes a series of characteristics that belong to employees and another that distinguish independent contractors. If your independent contractors have characteristics of employees, e.g., you get to decide when and where they work, federal agencies may not believe that they are independent contractors. Instead, they may be considered misclassified employees. That can mean serious consequences for you because it may look like you are trying to defraud the government.

If you have a legitimate reason to reclassify employees as independent contractors, contact a business lawyer in Montana, like the Silverman Law Office, PLLC, for the sake of everyone involved with your business. 


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