Many small business owners can't do their jobs alone. They often outsource help for certain tasks, which may include the use of contractors. The benefit of using contractors is that the employer does not need to offer them benefits, pay Social Security, Medicare, or state unemployment insurance. However, MA recently redefined how independent contractors are classified meaning more people will be considered employees in Massachusetts. This can have big implications for business owners who try to manage their costs.
Who are independent contractors?
The Massachusetts definition of independent contractors is quite stringent. It's a three-part test, and all three areas need to be met in order for the classification to apply.
- The work is done without the direction and control of the employer
- The work is performed outside the usual course of the employer's business
- The work is done by someone who has their own, independent business or trade doing this work 1
If you employ someone as a contractor that does not meet these three tests, they likely should be considered an employee in MA, and payroll taxes, including unemployment insurance, should be paid on their behalf. These additional taxes are significant cost increases on businesses who were previously using independent contractors under the old definition.
It's important to note that this test applies to each worker independently. Depending on the circumstances one worker could be classified as an independent contractor, and another an employee while being hired for a similar job.
What happens if an independent contractor is actually an employee?
If a business classifies someone as an independent contractor when they should be an employee, the business may be subject to fines and penalties. Paying the payroll taxes and unemployment insurance hurts profits but being in compliance is much better than the alternative of fines and penalties.
Being in compliance is important but can also be complicated. If you're an employer and are unsure if one of your workers is now considered an employee, you should reach out to a tax planner or the MA Tax Department.