In today’s business world most employers would rather classify the people, who help them achieve their objectives as independent contractors rather than employees. There are some obvious differences between employers and employees:

1.   Employers must withhold taxes from employees while independent contractors pay their own employment taxes.

2.   Employers have vicarious liability for the acts of their employees like a car accidents caused by employees. An independent contractor’s accident would not make the employer liable.

3.   An employer must pay unemployment insurance and have Workman’s Compensation Insurance for employees, but not for the independent contractors.

It is not enough for an employer to classify a worker as an “independent contractor.” There are different tests under federal and state law as well as case law, which determine whether a person is truly an employee despite being called an independent contractor.

There can be serious consequences for an employer whose “independent contractor” is reclassified as an employee:

1.      Income Tax withholding.

If an independent contractor is reclassified as an employee, a significant liability arises out of the failure of the employer to withhold employment income taxes.

If the independent contractor is actually an employee and he/she did not pay his/her own income taxes, the employer could be required to pay the tax that should have been withheld from the payments that were made to the employee.

2.      Social Security Tax. Federal Insurance Contributions Act (FICA).

This is commonly referred to social security withholdings and is required on all wages up to an annual limit. People who are correctly classified as independent contractors are responsible for their own self-employment taxes. If a worker were reclassified from contractor to employee, the business would be responsible for paying half his contributions.

This can result in back payments of 7.65% due to the authorities on all money paid to the incorrectly classified independent contractor.

3.      Other tax responsibilities

These would include the federal unemployment tax and any unpaid state employment tax.

4.      Workman’s Compensation Insurance.

If a contractor is reclassified to being an employee, the employer could be responsible for the contributions it should have been made to workman’s compensation. In addition, the employer will be responsible for future premium payments.

5.      Health and Welfare.

In the past, an employee’s rights to these benefits have been dependent on whether the employer has had benefit plans for employees.

Under the new health care laws, the employer’s liability will be far greater.

6.      Reimbursed business expenses.

Many independent contractors agree to bear their own business expenses, but there are statutory rights, which an employee has to expenses incurred during the course of employment.

7.      IRS Penalty Assessments.

The amount of such penalty assessments will depend on whether the employer “deliberately” misclassified employees to independent contractors or whether there was no deliberate intent to misclassify such worker.

If the Service decides that the employer deliberately misclassified workers, it can hold the employer responsible for all employment taxes that should have been paid, including income tax and the employer’s share of FICA and unemployment taxes. What could be worse is that the IRS is not limited to getting paid from the employer; it can attach the personal assets of officers, even in a limited liability company or corporation.

Conclusion

It is important that an employer correctly classifies business workers as either employees or independent contractors at the time of hiring services.

The government has announced that it will infuse $15 billion into the loan market for small businesses. This will make it easier for small businesses to obtain Small Business Administration (SBA) loans.

Applications for SBA guaranteed loans are made through regular banks. Certain banks specialize in SBA loans.

Besides more money being available through SBA loans, the fees involved in generating loans will be waived until the end of 2009. Furthermore, the SBA will guarantee 90% of those loans known as 7a Loans. This is up from 75%. The waiving of fees will only apply until the end of this year.

While there is more money available for SBA loans, the requirements for qualifying will not change. It will be essential to provide a detailed business plan showing how you intend to repay the loans.

The Department of Homeland Security is serious about employers ensuring that their employees are authorized to work in the United States.

From April 3, 2009 there will be strict compliance requirements in the completion of I-9 forms and other aspects of hiring employees. The U.S. Citizenship and Immigration Service has published a 65 page booklet which explains the requirements an provides photographs of documentation establishing work authorization. This booklet is available free here.

 There are certain advantages to incorporating in the state of Delaware, but many of these advantages are lost to corporations that intend carrying on business in California.

You do not have to be in business in the state of Delaware to be registered there. However, if you carry on business in the State of California, you will still have to pay the usual California corporate tax, because your Delaware corporation must be registered in California.

The Corporate Franchise Tax can be as low as $60 (USD), in Delaware but if the corporation is doing business in California you still must pay the California Franchise Board.

The state of Delaware claims to be pro-business, because many business and corporate issues are decided by their Chancery Court, which reaches decisions without jury trial. The judges also concentrate on business law so they are more familiar with business issues.

It is necessary to have a registered agent in Delaware.

Other reasons to incorporate in Delaware:

• Shareholders can act in writing without the need to hold meetings. People who are not shareholders may serve on the Board of Directors.

• Notwithstanding the number of shareholders, one person can act as the only officer and director of the corporation. Note: In California, the same is possible if there is one shareholder.

• There is no Sales or Personal Property Tax in Delaware.

• If you wonder why so many banks are registered in Delaware, it is because that state has given them a wide birth on the interest rates that they may charge. So if your interest rate is sky high, you can be sure the corporation is registered in Delaware.

• Before insisting on setting up a Delaware corporation, it is a good idea to refer to legal counsel to determine whether there is a real benefit for you in having a Delaware corporation doing business in California.