August 21, 2020
Contractor vs. Employee
The question of how a person should be paid, via contractor or employee, comes up many times during the year. Especially during our Consulting and Administrative Audits with ministries across the country.
Related post: W-9’s and 1099’s
Tips of Classification
In our training on this topic, we talk about the areas below along with a few more.
- Why this topic is important
- Determining the correct classification
- Applying the test of misclassification
- How to correct when misclassified
Degree of control, permanency of relationship, and the provisions provided are three of the eight determining factors. The test is applying the eight factors against your particular situation. If there is a correction that needs to happen, there is a voluntary IRS program you can qualify for. View more about the Voluntary Worker Classification Program here.
Essential Factors of a Contractor
Behavior Control, Financial Control, and Type of Relationship are the essential factors to determine if someone is an Employee or a Contractor. To learn more about the specifics of these three factors, view IRS Publication 1779.
Learn more: Employee or Contractor
Just like it sounds, control is the main factor. Control over when and where the work is done and control over pay and benefits. If the control is coming from the individual – contractor is most likely the correct choice. But if the organization is calling the shots, then they are most likely an employee.
Anti-Fraud Checklist
We would be remiss if we also didn’t mention some anti-fraud checks regarding the area of Employee or Contractor payroll checks. While our training includes more areas, some of the big ones include:
- have multiple – and not related – check signors
- ensure clear backup documentation is available for every check before signing
- ensuring correct and timely filing of tax forms and reports
Related Post: Credit Card Policies, Agreements, & Forms
Lastly, for those persons who have been classified as a contractor, proper backup documentation should be obtained before the first check is cut. The IRS recommends the use of the Form W-9 to obtain the required information of a person or unincorporated entity receiving payment for services and rent. Back-up withholding of 28% on any 1099 payment is added if a W-9 is not collected before the payment is made, per IRS requirements.
For those individuals who will be classified as employees, Form W-4 is the proper documentation to obtain before services are performed. Also included in our training is a section on Federal Wage and Hour Laws where we talk about current laws and how to apply them to your specific ministry.
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