A construction company that hires an independent contractor will save considerable costs by avoiding payroll-related taxes and increasing workforce flexibility.
However, companies can incur costs if they are to classify their workers wrongly. They will face severe penalties if they don’t follow the rules set by federal law. Thus, it is crucial to make the best hiring decisions to understand what is meant by an independent contractor in the construction industry.
If you’re a construction company manager who wants to save money, especially on short-term projects, read on to determine who classifies as an independent contractor and how the hiring process works.
Independent contractors, like attorneys and fitness coaches, are self-employed and run their businesses. They are responsible for handling their self-employment taxes and other financial obligations..
In the construction industry, independent contractors are electricians, plumbers, and painters working on specific projects for the general contractor. They aren’t regular workers, so employers don’t pay their payroll taxes. Also, employers are not responsible for their health insurance or material costs.
They also can’t follow regular company no call no show rules meant for your full-time and fixed workers.
Sometimes companies find it challenging to decide if a contractor is an employee or not, especially if there’s no clear information during background checks. That’s when searching through federal and state-level data can come in handy.
Construction companies looking to work with independent contractors typically search through their local directory or online platforms. Posting an ad can also work but can lead to an influx of unqualified candidates knocking at your door.
Contractors looking to work with you should mention their pay rate, qualifications, and portfolio of past projects. Understand that contractors are also business owners, and some may inflate their rates. You can conduct several interviews with multiple candidates and analyze your total project costs to help you decide on a reasonable rate.
When you decide on a particular candidate, remember that misclassification when hiring independent contractors results in fines and penalties.
Before paying independent contractors, here’s what you need to look into:
If you’re working with an electrician who has his team to implement new electric lines for a building, you’re establishing a partnership. But if you hired an electrician as an in-house employee, you can’t classify him as an independent contractor even if he has a side job.
The IRS makes it possible for companies to determine the status of workers by analyzing three main factors:
Behavioral: Does the company have the right to control what the worker does and how they do their job? Like following certain company ethical policies?
Financial: Are the business aspects of the worker’s job controlled by the payer? These include contractor payments, whether expenses are reimbursed, who provides tools/supplies, etc.
Type of Relationship: Are there written contracts or employee-type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue, and is the work performed a vital aspect of the business?
When you still can’t decide on a worker’s status, the best thing you can do is request an SS-8 form from the IRS.
Besides the IRS, there’s also the Department of Labor Classification or DOL. This body deals with workers’ rights and fair compensation.
If it is found that an employment relationship exists, the employer needs to cover the worker under the following provisions mentioned by the Federal Labor Standards Act or FLSA:
· Minimum wage
· Overtime pay
·Employment of youth workers
No set rule identifies an employment relationship. Generally, when an employer holds more authority, control and interferes/provides material for work, a worker has a higher chance of getting classified as an employee.
In 2011, the Internal Revenue Service (IRS) and the US Department of Labor (DOL) signed a Memorandum of Understanding to fight worker misclassification. As of 2018, most states have signed this Memorandum to control employees from being misclassified (and to “protect” state and federal tax revenue). Several states, such as Delaware, New York, Illinois, Maine, Maryland, New Jersey, and Pennsylvania, even have worker misclassification laws targeted directly at the construction industry.
Some states have set their guidelines for classifying workers. It’s vital to consult your state’s laws on payment terms, particularly when paying contractors.
Some states, like California, use an ABC test that requires three factors to be met to be considered an independent contractor.
One of the key aspects of a successful project is knowing how to properly pay contractors.
After you’re ready to start working with an independent contractor, it’s crucial to have them sign a W-9 form. This IRS form is also known as “Request for Tax Identification Number and Certification.”
It requires the independent contractor to enter their tax ID number, social security number, or employer ID number on the form.
If they don’t enter their tax ID for any reason, they are subject to income tax withholding.
Income tax withholding refers to a specific percentage (currently 24%) that the employer withholds federal income tax from the payment until the contractor provides a valid tax ID.
As an employer, you should also fill out an IRS form called the 1099-NEC form. This form is needed for reporting non-employee income for a tax year. Even in case of withholding, you still have to file a 1099-NEC form.
With the federal and state governments pouring millions into audits and investigations, a construction business is at risk of losing its money if caught hiring independent contractors illegally.
Currently, law and enforcement procedures are changing around independent contractor classification. And construction companies seeking employees should keep in mind the following:
Accounting firms can also assist you in determining proper employee classification and law firms can provide you with up-to-date legal advice, particularly about paying contractors and handling self-employment taxes.
Construction workers are considered employees when given equipment, business cards, and regular assignments. They are also subject to employee benefits such as vacation leaves and insurance. In contrast, independent contractors have their own equipment, do not get paid time off, and have their own insurance.
If you’re still in doubt of a worker’s independent contractor status, you can check with the Internal Revenue Service by filing an SS-8 form. You can also check DOL and State clarifications to be on the safe side.
Forms such as W-9 and 1099-NEC are crucial when reporting federal income tax and dealing with income withholding, especially for contractor payments.
Independent contractors who perform services must have their own office, address, and telephone number. They should run an independently established trade, control their advertising and have a customer list.
The customer list can tell you that you’re not the only employer the contractor is working for. An independent contractor should also have a valid business license registered with the state.
Another convenient method of paying contractors, particularly international contractors, is through direct deposit. This ensures quick and secure transactions, saving both you and the contractor time and effort.
For more information about tracking workers in construction, check out our article about GPS tracking here.
There are a lot of ways to deal with no call, no show employees. The policies you enforce will depend on the type of manager you are.
Naturally, productivity and work ethics are positively and strongly correlated. There are many ways to set up a work environment where ethics are valued, and one of the most effective ways has proven to be guidance and empowerment. If you are ready to tak
Having an employee handbook is essential to the efficient operations of your business. In general, it contains all the procedures and policies that go on in your firm. It’s vital to have one, especially in construction companies, where logistics plays a h
