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Types of Workers

We categorize workers in many ways: part-time, on-call, day workers, full-time employees, independent contractors. So what paperwork and taxes are required for each?

The IRS has two classifications - employees and non-employees. On the surface,the IRS makes it pretty simple - if a worker doesn't fall into the non-employee category, she is automatically an employee.

IRS rules and laws determine whether a worker falls into the non-employee category - not agreements between workers and businesses - or even contracts. Certain workers are always non-employees (called statutory non-employees). These include

  • Direct sellers who sell products door-to-door to the final user
  • Licensed real estate agents
  • The other non-employee is an independent contractor. Before we get to describing independent contractors, please note that part-time, on-call, and day workers are all employees, and you are their employer. So even though a worker may only work for you for a very short period of time, they are employees and you have to file employer paperwork.

    So what is an independent contractor? Independent contractors operate their own business, take entrepreneurial risk, get their own clients, and have their own tools. They are generally paid by the job, not by the hour. They have the right to use others to do the actual work. Independent contractors can't be "fired" - they can only have their contract terminated for cause.

    Some workers must be classified as employees even if they meet the criteria above. The IRS has four groups that are automatically employees:

  • Food (except milk) and laundry drivers;
  • Full-time traveling salespeople who sell goods to people who will re-sell the item;
  • Full-time life insurance agents working mainly for one firm
  • At-home workers who are supplied with the materials or goods and are given specifications of the work to be done.
  • The $600 rule Some employers erroneously think that you have to pay someone $600 before they become an employee. The $600 rule only applies to the requirement for filing a W-2. Usually this applies to day laborers. These workers are still employees and you are liable for providing workers compensation insurance, deducting employee taxes, and paying employer taxes. While it is hard to track and enforce these requirements, you should be aware that legally you are their employer.

    Click here for the criteria used by the IRS to determine whether a worker is an independent contractor.

    Independent contractor / employee checklist - developed by the Society of Human Resource Management

    Click here for a sample independent contractor agreement.

    The information here is a summary and is provided as a public service under contract with Startupkits.com. Please visit the IRS website for complete information.

    Using Independent Contractors? Consider the Voluntary Classification Settlement Program (VCSP)

    Many businesses are learning that the workers that they thought were independent contractors are being re-classified as employees by the IRS and courts. There have been many myths about independent contractors that have caused businesses to misclassify the workers. The truth is that independent contractors must be in business for themselves - take entrepreneurial risks and get enterpreneurial rewards. Businesses cannot "do something" to make their workers independent contractors - it is like putting lipstick on a pig and calling the result a horse.

    In the past, it has been very costly for businesses to correct this mistake - because they would be charged huge penalties that threatened the business's financial future. So, in 2011, the IRS launched a Voluntary Classification Settlement Program (VCSP), that allows businesses to pay less than 10% of what they would owe if they are audited and caught by the IRS.

    Here is an 9 minute video about the right way to work with independent contractors and information about the Voluntary Settlement Program if you cannot comply. http://missoula.toolsforbusiness.info/settlement/

    Here is a more extensive video (1 hour) from the IRS- Proper Worker Classification - IRS video

    Here is information about the IRS Voluntary Settlement Program

    Returning Vets/Wounded Heroes - Tax Credits and Job Board

    Our combat servicemen and women are home, but now face a huge hurdle: they need to find jobs and readjust to civilian life. ABC News reports that veterans' unemployment rate is 3% higher than the national average.

    Businesses can help in three ways:

    Here are additional resources:

  • Ten Top Reasons to Hire a Veteran - information from Americas Heroes At Work
  • Want to hire veterans? Here's a step-by-step toolkit
  • Americas Heroes at Work: Employer resources
  • Employer Support of the Guard and Reserve
  • AskEarn.org: Resources to help employers hire people with disabilities
  • Here is a toolkit for hiring and working with veterans
  • One Stop Career Center

    You can find employees by contacting your nearest One Stop Career Center. These centers help work with employers to find employees that match the business' need. They also help individuals with resumes, job hunting skills, and interviewing skills.

    Your nearest One Stop Career Center is:

    Free job description tools

    Defining the job correctly and hiring the right employee are critical to your business success. Poor job descriptions lead to confusion and frustration by all. Bad employee choices cost companies lost productivity. Firing an employee can cause labor disputes and reduce company morale. We have two free tools to help you determine the job descriptions:

    Job Description Writer from the Career OneStops

    Find the right person: Interactive Hiring Tool from the SME Toolkit

    Work Opportunity Tax Credit

    If you hire workers from one of the eligible groups below, you can receive up to 40% of their first year's wages as a federal tax credit.

    What workers are eligible?

    There are 9 eligible groups:

    1. Qualified recipients of Temporary Assistance to Needy Families (TANF).
    2. Qualified veterans receiving Food Stamps or qualified veterans with a service connected disability who:
      • Have a hiring date which is not more than one year after having been discharged or released from active duty OR
      • Have aggregate periods of unemployment during the one year period ending on the hiring date that equal or exceed six months.

    3. Ex-felons hired no later than one year after conviction or release from prison.
    4. Designated Community Resident - an individual who has attained ages 18 but not 40 on the hiring date who reside in a Renewal Community, or Rural Renewal County.
    5. Vocational rehabilitation referrals, including Ticket Holders with an individual work plan developed and implemented by an Employment Network.
    6. Qualified summer youth ages 16 through 17 who reside in an Enterprise Community, or Renewal Community.
    7. Qualified Food Stamp recipients ages 18 but not 40 on the hiring date.
    8. Qualified recipients of Supplemental Security Income (SSI).
    9. Long-term family assistance recipients.
    10. Unemployed veterans hired after 2008*
    11. Disconnected youth*

    *For information about qualifying unemployed veterans and disconnected youth, visit www.doleta.gov/business/incentives/opptax/

    How much is the credit?

    40% of the employees wages up to $6,000. (Up to $12,000 for Service disabled employees; up to $3,000 for qualified summer youth). If the workers is a long term recipient of Temporary Assistance to Needy Families, you can get additional tax credits.

    Requirements You must complete the paperwork and establish eligibility BEFORE you hire the employee. Employees must be retained at least 400 hours for the 40% tax credit. If they are retained for 120 to 400 hours, a 25% tax credit is available.

    Click here for more information.

    Hiring a Risky Job Applicant? Free Federal Employee Bond

    The federal government's federal bonding services provide 6 months of bonding insurance to protect employers against employee dishonesty. The program is designed to eliminate the risk of hiring at-risk job applicants including: ex-offenders, recovering substance abusers (alcohol or drugs), welfare recipients and other persons having poor financial credit, economically disadvantaged youth and adults who lack a work history, individuals dishonorably discharged from the military, and anyone who cannot secure employment without bonding.

    The bonding service is user-friendly and covers any type of stealing: theft, forgery, larceny or embezzlement. There is no cost to the employer. After 6 months, the employer can convert the policy to the private sector and pay any premiums.

    Click here for more information

    Click here for your state administrator for this program.

    Finding the Pay Rate for Your Employees

    The US Department of Labor tracks the pay rates for 850+ jobs and provides you the average pay nationwide and in your area.

    To use this tool:

    • Click on this link http://www.bls.gov/oes/current/oes_nat.htm
    • Choose the occupation
    • You will see the number of people in that job in the US, the median (or middle) hourly rate, the mean (or average) hourly rate, and the mean (average) annual rate. The last number is their error range.
    • Click on the occupation title
    • You will see choices at the top, including State profile for this occupation, and Metropolitan area profile for this occupation. This is where you can see the states with the highest number of workers in this occupation and lower on the screen, the top paying states for this occupation.
    • BEFORE you click on "Create a Customized Table", scroll to the top to find out the number next to the type of occupation you are seeking. You will need this to create your customized table.
    • Now click "Create a Customized Table"
    • Choose "multiple occupations for one geographical area" (already selected)
    • Select state or metropolitan area, and then choose the correct location
    • The next part uses the occupational number that you found. Fortunately, these occupations are listed in numerical order. Select the occupation
    • You will see the mean (average) hourly and annual wage. Then you will see a series of percentile wages. This is what people in the bottom 10% earned; the bottom 25% earned, and so on.