The Employer's Legal Resource: Contractors - Get It Wrong and Pay the Price
You've read the headlines. The IRS and various states are cracking down on the misclassification of workers. If a person is an "employee," the taxing authorities want them treated as such and they want their fair share of the taxes. Oklahoma has now jumped on board. There is a new law going into effect November 1 affecting "contractors." Before we get to the new law, let's see who it covers.
"Contractor" includes all prime and general contractors, subcontractors, independent contractors and persons engaged in contract labor who (through negotiations or competitive bidding) enter into contracts to furnish labor, materials or both and the required equipment to perform the contract for a fixed price and who in pursuit of independent business undertake a job in whole or in part retaining substantial control of the method and manner of accomplishing the desired result. This includes any form of business be it an individual, partnership, corporation, etc. engaged in the business of the construction, alteration, repairing, dismantling, or demolition of roads, bridges, viaducts, sewers, water and gas mains, streets, disposal plants, water filters, tanks, towers, airports, buildings, dams, levees, canals, railways and rail facilities, oil and gas wells, water wells, pipelines, refineries, industrial or processing plants, chemical plants, power plants, electric or telephone or any other type of energy or message transmission lines or equipment, or any other type of construction excluding family farm operations. It does not include the State or any political subdivision.
So if you are a Contractor, effective November 1, 2012, the following applies to you:
Any contractor that intentionally misclassifies individuals as independent contractors rather than employees for the purpose of affecting procedures and payments relating to withholding and social security, unemployment tax or workers' compensation premiums shall be fined by the Oklahoma Tax Commission an amount not to exceed ten percent (10%) of the contractor's total bid, which shall be in addition to any other penalties allowed by law.
And, to help the OTC enforce this, the law provides for the sharing of information and the coordination of investigations and enforcement among the OTC, the Oklahoma Workers' Compensation Court, CompSource, the Oklahoma Department of Labor, and the Oklahoma Employment Security Commission. Not surprisingly, each of these entities benefits upon the classifying of a worker as an employee (versus an independent contractor).
So, what do you do now?
Persons you pay as "employees" for whom you withhold taxes and issue W-2 Wage and Tax Statements - You don't need to do anything. The various agencies are getting their money and won't be bothering you (about this issue anyway).
Persons you pay as independent contractors for whom you do NOT withhold taxes and for whom you do NOT issue a W-2 Wage and Tax Statement - You need to take a look at these relationships and be sure that they are truly independent contractors and not really employees you simply pay as a contractor. Unfortunately, every agency, court, and law has their own individual test to determine whether a person is an employee or an independent contractor. If you are looking for a good worksheet to assist you, take a look at the IRS Form SS-8. Or, contact an experienced employment attorney to assist you.
By Kristen L. Brightmire, firstname.lastname@example.org