Employer Question: Temporary Employment = Contract Labor?

These are definitely not the same thing.  The question posed is this:  An employer is hiring a person in a low-level position who was laid off from his previous high-paying job and the new employer knows that this person is going to be looking for permanent employment elsewhere.  If that person is probably only going to be working for the company temporarily, can the employer keep things easy and pay that person as contract labor?  The answer is a definite NO.  There is no period of time of employment that enters into the decision of contractor versus employee.  Regardless of the amount of time that person works for you, if he meets the definition of an employee, then he should be set up as such.  

IRS Audits Contract Labor

A CPA colleague contacted me yesterday to let me know that one of her clients is being audited by the IRS for paying contract labor.  This particular issue is emphasized by one of my prior posts.  The IRS and the state unemployment commissions do not like the contract labor classification, and it is a difficult position for an employer to defend.  If I hear any more detail regarding this case, I will post it here.  

There Is No Such Thing As Contract Labor!

That is what a retired IRS revenue agent told me a few months ago. He now operates a consulting practice assisting those on the “other side” with tax problems. I thought this was interesting and states very clearly the IRS position for the age old question of whether a worker should be classified as an employee or a “1099” vendor or contractor. What he means is that if you hire someone to work for you in your business and the only way to classify your payments to them is as “contract labor” then that person should probably be set up as an employee, having taxes withheld and you as the employer contributing half the social security and medicare. If the person fits more in the category of a consultant or professional service provider, then that implies most likely that person has other customers and his/her own business. The term “contract labor” assumes the person is under your control – you dictate how and when the job gets done. Many employers classify workers as contract labor to save money, but as in the case of paying a nanny as I discussed here, it could be an expensive decision and you could be liable for back taxes. Here is some official IRS guidance on the issue. However, if in doubt it is always best to err on the side of caution, do the right thing, and set that person up as an employee.