A reader sent me a question about employees and independent contractors and the new Jobs Bill that was signed into law on March 18, 2010. The reader asked, "Can I convert an independent contractor to an employee and get the tax credits?" Another reader left a comment about receiving a "contract" position and her employer wanted her to sign an affidavit that she had been unemployed. There are a couple of issues here, so let's take them one at a time:
1. First, you must have a legitimate reason for calling this worker an employee, rather than an independent contractor. You can't just say, "I want Tom to be an employee now so I can get the credits," or "I want to hire Sheryl as an employee instead of as an independent contractor." There are specific requirements for classifying a worker as an independent contractor vs. an employee. For example, if the person does work that is unrelated to your business, haw his or her own tools, and comes and goes when he/she wants, the worker is independent. You can't just say,"Voila! You're an employee!" The IRS has three general qualifications to distinguish between independent contractors and employees: behavioral control, financial control. The IRS is also very quick to call your decision to classify someone as an employee or contractor into question. You can read about the distinctions in my article on Independent Contractors vs. Employees.
2. Second, the person you hire must have been unemployed before being hired, in order to be qualified:
- The qualified worker must have not been employed for more than 40 hours during the previous 60 days, as attested to in an affidavit signed by the worker.
- The qualified worker cannot be hired to replace another employee, unless that employee left voluntarily or for cause. You can use the credit to rehire a previously laid off worker.
3. Third, you don't have to pay FICA taxes and other taxes when you hire independent contractors. If you make the person an employee to get the tax benefits, you are going to have to start paying your share of Medicare taxes, and deducting Social Security and Medicare taxes from the person. Seems to me this kind of defeats the purpose of getting the tax break, if you have to pay more to do it. Learn more about what payroll taxes you must pay for employees and consider all costs in your decision.
4. Finally, there are limits on the tax deductions and credits you can take and the employee must be qualified in several specific ways:
- You don't have to pay your employer portion of Social Security taxes for qualified hires starting with pay after March 19, 2010 through the end of this year. But, as I stated above, you must still pay Medicare taxes for that employee and you must deduct Social Security and Medicare from the employee's pay.
- You may be eligible to apply for a tax credit of up to $1000 for 2010, for qualified employees hired under the Jobs Bill. You won't get this credit until you file your 2010 tax return, next year. If the worker is part-time, or if you hire the worker late in the year, you may not get the entire credit; it is 6.2% of the wages you pay to the worker in 2010, up to the maximum of $1,000.
- Read more about the specific qualifications each employee must have, and how you must verify unemployment status in my article about the Jobs Bill.
As with all business decisions, consider carefully whether you want to hire someone as an employee just to get the tax benefits from the Jobs Bill. Cost/benefit analysis, and all that.