If you have an employee who has unfulfilled child support obligations, you might be contacted by authorities. In these cases, a local court or government agency may send you an order to withhold a portion of wages from the employee, to collect back child support.
Complying with these orders is only required with workers who are employees. If you’re treating someone who performs work for you as an independent contractor, you’re off the hook in terms of withholding income in response to an order to withhold. However, in some cases, people who should be treated as employees are wrongly characterized as independent contractors. The Office of Child Support Enforcement (OCSE) wants to be sure employers have properly categorized workers so they’ll be able to fulfill income withholding orders (IWOs), if necessary.
The OCSE isn’t the only government entity that wants you to classify workers appropriately. The U.S. Department of Labor (DOL), the IRS, and state tax authorities also have skin in this game. The DOL wants as many people as possible to be covered by the labor laws that it enforces. In addition, the IRS is more confident that all the taxes that should be paid based on individual income will be paid when taxes are withheld by employers, rather than through quarterly payments made by individuals.
Also, despite the occasional glamorization of working as a freelancer, many workers would prefer employee status if they could achieve it. Why? Working as an employee adds greater job security and employee benefits that generally go with traditional employment. Here’s what the OCSE says about the difference between an independent contractor and a bona fide employee.
“To determine whether a person is an employee or an independent contractor, the company weighs factors to identify the degree of control it has in the relationship with the person.”
These factors include whether:
- You (as the employer) control or have the right to control how the worker does the job,
- You control the business aspects of the worker’s job. These include arrangements such as how he or she is paid, whether expenses are reimbursed, and who provides tools and supplies,
- There’s a written contract between the company and the worker, and whether he or she receives any non-cash compensation in the form of benefits such as a retirement plan, insurance or vacation pay,
- The relationship with the worker is likely to be long-term, and
- The nature of the work performed is vital to the success of the business.
IRS Worker Status Criteria
The IRS dedicates a lot of ink to making sure workers are properly categorized. One key consideration is the level of control exercised by a company. This can tip the scales one way or another. Control factors the IRS looks at include: behavioral, financial and the “type of relationship.”
In describing a company’s behavioral control over a worker, it identifies four categories.
1. Instructions given. This involves when and where to do the work, and what order and sequence to follow when performing it.
2. The “degree of instruction.” The greater the detail, the more a worker will be considered an employee.
3. Variability. Is the worker evaluated just on the end-product, or also on how the work is performed?
4. Training. Detailed training “is strong evidence that the worker is an employee,” according to the IRS.
Financial control is measured by factors including whether the company provides equipment for the worker to use, whether he or she is reimbursed for expenses, whether the worker has any guarantee of regular payment, and if there is freedom to “seek out other business opportunities.” In other words, does the worker do jobs for other customers or clients?
The “type of relationship” takes into consideration the “permanency of the relationship,” among other factors.
Decide with Care
The bottom line, according to government authorities, is that there’s no specific number of factors that will result in a determination that a worker will be deemed an employee. Factors that are relevant in one work setting might not be in another.
“The keys,” according to the IRS, “are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally to document each of the factors used in coming up” with your own determination. If you feel there are too many gray areas to make a proper decision, run the details of the situation by a labor law specialist or HR professional to get an objective viewpoint. You should also consult a professional if you have any questions about child support withholding orders.