Employees VS Independent Contractors
Misclassifying employees as independent contractors is one of the most common and costly mistakes that employers make. The IRS, the Federal Department of Labor as well as many state’s departments of labor, have guidelines on how to determine if a worker should be classified as an independent contractor.
The IRS, the US Department of Labor (DOL) and many state’s departments of labor set different criteria to evaluate the relationship between employer and worker. None are definitive tests, but there are many common factors that these agencies use when evaluating the classification of workers.
Be sure to seek the advice of a licensed HR Professional, Certified Public Accountant, IRS Enrolled Agent before hiring staff to make sure you classify your staff correctly.
For more information about how to sucessfully hire staff see our Hiring Course.
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The US DOL and Fair Labor Standards Act have established the 6 following factors to be considered when determining a worker as an Independent Contractor or Employee.
- The extent to which the work is an integral part of the employer’s business 2. The opportunity for profit or loss by the worker
- The source of tools and equipment
- The amount of skill and initiative required to perform the job
- The permanency of the relationship
- The nature and amount of control by the employer
Many states’ Departments of Labor have adopted the ABC test; this includes:
- The worker is free from direction or control in performance of the work
- The work is outside the usual course of business and typically done off of the business premises.
- The worker is customarily engaged in their own trade, occupation, or business.
Per Common Law Rules established by the IRS, in order to be classified as an independent contractor three aspects should be considered:
- Behavioral Control
- Financial Control
- Type of Relationship
*Note: There are also specific requirements for what needs to be included in the independent contractor agreement, and parties must act accordingly. For example, in Colorado, one of the items is that payment will not be made to the individual personally but to the contractor’s trade or business name.
A payroll company like Gusto can help generate an independent contractor agreement that is compliant in your state or region.
Independent Contractor or Employee?
If you are on the fence as to whether a worker is an employee or independent contractor, a best practice is to consider them an employee until proven otherwise. Make sure that you take a look at your classifications closely. If you misclassify a worker as an independent contractor you will owe back wages and overtime, back taxes for both the employer and employee and state or federal penalties which can be upwards of $10,000 – $25,000 per misclassified employee.
Once someone begins working under your control and direction performing tasks that are within the regular scope of your business, they are likely an employee.
If they are truly an independent contractor, they should fill out a form W-9 issued by the IRS. Once they make $600 or more through your business, they are required to be provided Form 1099 at the end of the year; which is similar to a W-2 but is specifically for independent contractors.
Paying Employees for Overnight Visits
Fewer and fewer pet sitting companies with employees offer overnight visits because in many states, employees need to be paid at least minimum wage for all of the hours they work, even if the employee is sleeping.
For example, if the minimum wage in your state is $12/hr and your typical overnight visit is from 9:00pm to 7:00am, you would need to pay your employee $120 for that visit.
Even though many clients request overnight visits, you can often set them up with 3-4 drop in visits per day. The drop in visits offer more active playtime and attention for the clients pets and are easier to hire for.
Certification and training for Independent Contractors
You can not train independent contractors directly because the worker must be free from direction or control in the performance of work. However, you can prioritize independent contractors who have achieved certification for pet sitting and dog walking.
The CPS-DW team training page is specifically designed to train either independent contractors or employees. You can make this training available to your staff and prioritize those who completed the course.
For more information see our Team Training Page.
In general, if your independent contractor has their own LLC and their own insurance, they will be considered an independent contractor. However, you need to also follow the Independent Contractor guidelines listed at the beginning of this article. If you misclassify your workers, you will be required to pay all payroll taxes for all of the previous work done by your staff. This can be a huge bill.
So, if you decide to hire Independent Contractors, make sure you know what you are doing.
Seek the advice of an HR professional (usually through your payroll company, like Gusto) to be sure you are following all of the labor laws in your country or region. Also, work closely with an insurance agent who can offer insurance to your independent contractors. You can find a list of recommended pet sitting insurance companies on our Resources Page.
For pet sitting, it is generally easier to hire employees. There are fewer hoops to jump though and your new hires tend to tend to be more familiar with an employment relationship. It will cost you more to pay for workers’ compensation insurance and employer paid taxes, but you can charge your clients a few more dollars per visit to cover those costs.
Also, keep in mind, you may not be able to offer overnight visits when you hire employees if you need to pay them for the time they are sleeping.
Check out our article about how much to pay pet sitters to estimate the costs of paying your staff.
No matter if you hire employees or independent contractors, you will see more demand for your services when you hire a team because your clients know you will have backup sitters available when the need arises. You will also protect yourself from burnout.
To learn how to hire either employees or independent contractors enroll in our Hiring Course. This is the most comprehensive hiring course for pet sitters and dog walkers available today. It is the missing manual that will help you hire successfully. Click the link above to get instant access to four free hiring lessons.