Sarah Gutierrez

Accounting & Tax Specialist

We are all aware that it is common for a business to have employees and independent contractors performing their work. But there is a big question to ask yourself as a business executive – are we classifying our employees and independent contractors correctly? It is critical that businesses correctly determine this classification due to the following:

• The shifting of Social Security and Medicare payments as an established employee and employer
• The unemployment tax and benefit implications for both the employee and employer
• Legal obligations as an employer
• Costly penalties and fees for worker misclassification

Following the release of the 2021 Independent Contractor Rule, in which the Department of Labor (DOL) provided guidance on the classification of independent contractors versus employees under the Fair Labor Standards Act (FLSA), misconceptions and room for inconsistencies with the law arose.

Effective March 11^th, 2024, a new final rule regulation (RIN 1235-AA43) was released. This new rule revises the “economic reality test” that determines workers’ status under the FLSA. The main goal is to make sure workers are protected, classified properly, and that they receive the wages earned.

The new rule consists of a new economic reality test for employers to use to determine whether a worker should be treated as an employee or independent contractor. The test includes six factors, which increased from the five factors included in the previously released 2021 rule.

The following are the six factors to consider under current law.

1. Any opportunity for profit or loss a worker might have.
2. The financial stake and nature of ANY resources a worker has invested in the work.
3. The degree of permanence of the work relationship.
4. The degree of CONTROL an employer has over the person`s work.
5. Whether the work the person does is ESSENTIAL to the employer`s business.
6. The worker’s skill and initiative.

With the newly updated final rule for independent contractors, it’s a good time to review your vendor relationships for proper reporting. Beyond compliance with the FLSA, employers should be certain the determination of an employee or independent contractor is consistent with IRS guidance.

We hope this information is helpful. If you’d like to discuss the new Act and its effect on your situation, please contact the experts at Cray Kaiser at (630) 953-4900. For more information on Tax Guidelines for Independent contractors, please visit our blog.