How Changes to Independent Contractor Rules Will Impact Your Business

Transcript

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Gene (00:01):

Hey everybody and welcome to the Small Biz Ahead podcast. This is my weekly podcast. My name is Gene Marks, where I talk a little bit about something that’s impacting your business this week. And some advice and thoughts that I have. And uh oh, there are potential changes to independent contractor rules coming, and they may impact your small business. Pay attention: If your business like mine uses independent contractors, then new rules are coming from The Department of Labor that may change how you and I classify our workers. Many of us may be required to classify these contractors as employees. Now, currently there are a number of factors that are considered when determining, whether or not a worker is an independent contractor or employee. These factors include the permanency of the relationship, the nature and the degree of the control you have over that worker and the contractor’s opportunities for profit and loss. In an independent contractor relationship…

Gene (00:57):

The contractor is not entitled to any benefits of an employee like health insurance, for example. And if they’re responsible for paying their own taxes, right? I mean, you’ve got some of these people in your business, I’m sure. The business that’s you and me, we pay the contractor directly. And if more than 600 bucks during the year, we’ve gotta report these payments to the IRS via a form 1099. Right? We’re familiar with that. Well, all of this guys is about to change. Last month, The Department of Labor formally announced its plan to issue new rules as to how employers classify their employees and contractors. The Department of Labor has indicated that it’s going to be using or prefers to use what’s called the ABC rule to determine worker classifications. Let me walk you through this rule because one of the stipulates: B is the most important one for you and I. Well, A is the worker is free from control and direction of the hirer in connection with the performance of the work.

Gene (01:55):

So if you’re hiring an independent contractor, they should have complete control over what they’re doing. You’d be free to do it whenever they want. Fair enough. Right? Another part of this is that the worker is customarily engaged in an independently trade occupation or business. So if you’re hiring a 1099 worker, hopefully they’ve got other customers that they’re working for. They’re a separate entity. Fair enough. Right now, that’s really not that different in the past. Here’s the big one. And by the way, this is the B of the ABC role. The worker has to be performing work that is outside of the usual course of the hiring entity’s business. Outside of the usual course. So what that means is this: If you’re hiring a worker to generate revenue for you, that is not exactly outside of your business. And if that is what that 1099 worker is gonna be doing, you might have to include that person as an employee.

Gene (02:50):

Take my business for example, okay. When needed, I employ a handful of outside developers. They perform tasks for some of my clients and then I bill my clients for their time. Under this ABC rule, I may be required to classify those developers as employees because they are not performing work that’s outside of the usual course of my business, right? They’re actually doing development work, client project work and I’m billing ’em to my clients. They’re generating revenue for me, which means I would have to withhold taxes and potentially offer them participation in my company’s benefit plans. This holds true for any small business that uses independent drivers, content creators, technicians, trainers or specialists that are performing billable services for their customers. Is that you? It could very well be. What’s even more concerning is that these new rules could be applied retroactively as well.

Gene (03:45):

Now there are opponents to this, of course. I mean the many business organizations and associations representing freelancers. They say that these rules inhibit entrepreneurship and their freedom to practice independently. They argue that the new rules are gonna raise costs for small businesses, right? We’ll have to pay payroll taxes and benefits and that it’ll make it easier for unions to unionize as well. Some people just say it will give more worker protection. So that’s what the supporters like from it as well. Regardless, for you as a small business owner like me, it’s time to get ready. It would be wise for you to review your existing independent contractor arrangements and perhaps talk to a labor attorney. Okay. What else can you do? Make sure you’re prepared to pay more payroll taxes and benefits. If you think some of these are gonna qualify as workers, you may need to make adjustments to your contracts in order to cover the costs of these benefits and taxes.

Gene (04:39):

Also take a look at your insurance policies. Particularly what your workers’ compensation covers because if you have more people that are classified as employees, that’s gonna have an impact on your insurance premiums. The Department of Labor held two open forms about this in June to get feedback and is now they’ve begun their formal rule making process. And although no date has been given for the final rule, I’m kind of expecting this to happen before the end of the year. All right, by the way, even when that new rule is issued, there’s gonna be complications. That’s because the rule, it will likely not affect how states determine their worker classifications. And apparently it’s not even gonna change how the IRS determines independent contractors for tax reporting purposes. Are you confused about this? Yeah, you’re not alone. And that’s why a lot of attorneys are saying that lawsuits are going to be inevitable. Regardless of all of that worker classification, rules are changing. And those changes are on the way. If you have 1099s in your business and you are looking, you are using them to generate profit for your business. You might have to classify them as an employee. So watch out. Talk to a labor attorney or an accountant now and make sure that you are prepared. My name is Gene Marks. You have been listening…

Gene (05:56):

To The Hartford, Small Biz Ahead podcast. Hope this little bit of advice is helpful to you. Keep up to date on those worker classification roles, and I’ll keep you up to date on other things that impact your small business in this weekly podcast. Look forward to coming back and speaking with you again, take care.

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