Accavallo & Company, LLC

Employee vs. Independent Contractor Classifications


Employee vs. Independent Contractor Classifications
The classification of workers as either employees or independent contractors is a critical issue with far-reaching legal, economic, and social implications. The distinction between employees and contractors has become increasingly significant as the gig economy and remote work arrangements have gained prominence.

Factors Influencing Classification
The Internal Revenue Service uses the ABC Test to define employees versus independent contractors or workers as follows:

A.    Contractor is free from direction and control of the employer and has control over the time and place that services are performed.

B.    Contractor services are outside the employer’s usual course and/or place of business, independently invoiced and insured.

C.    Contractor is customarily engaged in an independently established business of the same nature as the services performed.

Consequences of Misclassification

Mismatched workers may be denied the legal protections and rights afforded to employees, such as minimum wage, overtime pay, workers’ compensation, and unemployment benefits. Employers may face legal claims, including lawsuits from misclassified workers seeking back pay, benefits, and compensation for denied rights.

Employers are responsible for withholding and paying payroll taxes for employees so misclassifying employees as contractors can lead to tax liabilities for unpaid taxes and face large fines and penalties from the US Department of Labor as well as the Connecticut Department of Labor.
Independent contractors are responsible for paying their own taxes, including self-employment taxes. Misclassified workers may not have been withholding appropriate taxes, leading to potential tax burdens.

Practical Implications for Businesses

Businesses face legal and operational considerations when determining worker classifications. Companies will need to navigate these complexities, including steps to take when classifying workers, the importance of clear contractual agreements, and risk mitigation strategies is crucial.
This includes ideas for adapting labor laws to accommodate modern work arrangements, improving social protections for freelancers, and finding a balance between flexibility and worker rights.

If you need additional information, please contact us at Accavallo & Company for further consulting, office at (203) 925-9600 or [email protected].

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Sherri Fisher is a Tax Manager at Accavallo & Company, LLC.  Sherri has longstanding expertise in Trust and Estate Taxation, Eldercare, and Estate planning. Sherri appreciates the relationships she has built with estate planning attorneys and advisors, to provide a team approach to assisting her clients. Sherri also has seasoned experience in business and individual taxation and is partial to assisting start-ups in developing overall accounting and operating plans.

Prior to joining Accavallo & Company, LLC, Sherri was a manager in a large firm, servicing high net worth trust clients, business, and personal clients. She was also a Partner in a large bookkeeping firm, which specialized in cloud accounting systems for regional and national companies. Sherri led a team in assisting clients to organize their accounting systems.  She is a graduate of Florida Atlantic University with a B.S. degree in Accounting.    

Sherri’s experience includes working with companies and organizations in a variety of industries including:

  • Investment Trusts

  • DAPT and Family Investment Partnerships

  • Estate and Probate Administration

  • E-Commerce

  • Manufacturing

  • Construction

  • Real Estate Investment

  • Marketing and Service-based industries

In addition to her professional accomplishments, Sherri is an Intuit Advanced Pro Advisor, Intuit Future Firm Advisory Board member, member of the Valley WIN Network, and proudly served as past Connecticut Public School liaison for the Yale Tommy Fund for Childhood Cancer. Sherri enjoys time with her family, Cleveland sports, thrifting and gardening.