Misclassification of Employees

Welcome to another fantastic read to help bring your financial goals to reality. It’s your favorite Money Motivator – Growth Instigator, Erica Fields bringing you the keys to your financial house!! I know the week ahead may seem treacherous for some of you but be encouraged by the journey ahead. You can’t grow without climbing high and nothing worth having comes easy.

Today we are looking at the effects of misclassifying of employees. Every business that endures the struggle of the startup process, especially the ones that started with a solopreneur will eventually feel the need to employ the services of others. At times, and usually at first, these will be contractors that you pay hourly or at a flat fee based on negotiated terms. And at other times, retention needs will arise out of demand for their services and business owners will have to make the decision to bring on employees.


Identifying errors in employee classification typically arise during tax time. Compliances like workers’ compensation and overtime pay are determined by the type of employment agreement in place. Independent contractors are not subject to these or other benefits, so the liability of tax assessment and certain insurance coverage is reduced or eliminated. Unknowingly paying an employee as a contractor can impose fines and restrictions on an organization.

Contractors don’t typically receive benefits such as health insurance coverage or overtime pay, unless negotiated, and are a low-cost alternative to offering employee positions. The disadvantage is that retention is often harder to maintain if the resource is looking for a more stable income and 401k match. The more expensive option of employing your staff comes with a hefty bottom line including requirements to pay overtime, provide benefits and pay unemployment tax. The Texas Workforce Commission (TWC) provides employers with a comparative approach for employment status. Their guidance provides employers that operation in the state with an easy-to-follow understanding of the difference between contractor and employee.

Common Solutions

If your small business is not quite ready to hire a full-time human resource and payroll administrator, there are ways to outsource the task to a more qualified resource. Your bookkeeping solutions provider should have options to help manage your payroll for you, staying on top of pay cycles, new hires and tax compliance. And if you are not quite ready to outsource to an agency, there are payroll solutions, such as Gusto, that help bridge the gap in compliance and keeping your employees paid.

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