Does the IRS consider your Agency Staff to be Employees or Independent Contractors?

Classifying your Staff According will help Prevent you from Paying back Taxes 

Insurance agencies frequently classify personnel as independent contractors, particularly producers. Often, a producer who needs additional markets will align with an agency. He gets access to the agency’s carriers and support staff; the agency gets additional revenue from his production. In addition, the producer must obtain his own errors and omissions liability insurance, saving the agency the cost of covering him.

The problem with classifying a producer this way is that he might not be an independent contractor in reality. Rather, he may fit the legal description of an employee. Can the agency properly classify the producer as an independent contractor? It depends.

The Internal Revenue Service has criteria for determining whether someone is an employee or independent contractor. However, even they admit there is no magic number of factors that tip the scale one way or the other. In fact, their Web site says that factors relevant in one situation may be irrelevant in another. Here are the questions they ask when reviewing a situation:

– Does the business tell the worker when and where to work? Does the producer have to be present in the agency’s office at certain times?

– Does the business provide the worker’s tools and equipment?

– Does the business determine which individuals perform certain tasks? Is the producer permitted to pursue only accounts of a certain size or in specific classes?

– Does the business give the worker detailed instructions on how the work is to be done? Which agency procedures are producers required to follow?

– Does the business evaluate the worker based on how the work is performed?

– Does the business train the worker on how to do the work? What kind of training does the agency give the producer – training on carrier programs, or basic sales training?

– Does the worker have a significant investment in the equipment used? Did the producer provide his own computer and printer? Does he use his own mobile phone most of the time?

– Does the business reimburse the worker for expenses, such as the cost of taking clients to lunch?

– Does the worker have the opportunity to make a profit or loss?

– Does the worker offer his services to other similar employers? Does a producer’s agreement with your agency permit him to place business through competing agencies?

– Does the worker receive a periodic wage, a commission, or a flat fee for the job? Is the producer receiving salary plus commission or straight commission?

– Does the worker receive employee benefits?

– Is the worker hired for a set period of time, or is the duration indefinite?

– Is the worker providing services that are a key aspect of the employer’s business?

For example, a producer who sets his own hours, covers his own expenses, works only on commission, does not receive employee benefits, and is evaluated only on the amount of business he produces is likely to be classified as an independent contractor. A producer who has an office at the agency, with agency-provided phones, computers, printers, and other equipment, and who is expected to attend staff meetings and training sessions, should properly be classified as an employee.

The consequences for businesses that misclassify workers can be painful. They will have to retroactively pay Social Security taxes, Unemployment insurance premiums, Workers’ Compensation insurance premiums, and penalties. The IRS will also charge interest on the overdue taxes. State regulators may also assess penalties. Employers could be fined for evading Workers’ Compensation benefit requirements. State labor departments may penalize them for violating state wage and hour laws. 

In addition, employers who misclassify employees on a large scale can be the targets of lawsuits for unpaid wages. Even smaller employers are vulnerable to legal actions. Four plumbing and heating contractors in New York City, all under common ownership, misclassified 25 workers. They collectively paid $1.4 million to settle this and other charges. The amount included unpaid back wages and damages.

Properly classifying workers can be confusing. Before classifying an individual as an independent contractor, an agency should check with the IRS, state tax and labor authorities, or human resources experts. No one wants a bill for unpaid back taxes. Do your homework and classify workers properly.