With emerging projects and partnerships, it’s common for businesses to utilize non-employee labor. However, if new to the world of contingent workforce, it may be confusing when filing taxes for the first few times. Are you wondering what is non-employee compensation? Below, we will define and discuss non-employee labor and compensation and explore how to classify a contractor and how to classify a non-employee when filing taxes.
Non-Employee Labor: What is Non-Employee Compensation?
Non-employee compensation refers to the money a company pays to an independent contractor who performs contingent work. Therefore, non-employee compensation includes fees, commissions, prizes, and awards for any services completed.
According to a 2017 report from the U.S. Bureau of Labor Statistics:
3.8 percent of workers—5.9 million persons—held contingent jobs. … These contingent workers are persons who do not expect their jobs to last or who report that their jobs are temporary. Using three different measures, contingent workers accounted for 1.3 percent to 3.8 percent of total employment.
As non-employee labor is part of the contingent workforce, you treat the compensation procedure different from that of a traditional, full-time employee. For example, you will not withhold taxes for an independent contractor as they are not affiliated with your payroll.
Therefore, before paying non-employee compensation and reporting the wages, you must determine whether a worker is an employee or an independent contractor.
Classifying Workers: Non-Employee vs Employee
When deciding how to classify your employees from independent contractors, consider your relationship with the worker. For example, if the worker has the option to choose the work they do and how to perform said tasks, they are usually considered non-employees.
The Department of Labor (DOL) examines six economic factors to help determine the worker’s status. Therefore, according to the DOL, answer the following questions about the worker:
- Does the worker play an integral role in the business?
- How long has the worker worked for the same company?
- Does the worker use his/her own tools or equipment?
- Who decides hours and pay rate?
- Can the worker earn a profit by performing the job more efficiently?
- Does the worker have a separate business site and/or advertise independently?
Tax Classifications for Non-Employees
Accurately classifying workers is paramount for both the business and worker when filing and depositing taxes. With part-time and full-time employees, you withhold taxes from their wages to cover taxations including state income tax, social security, and federal income tax. However, once you pay a worker as a nonemployee, the worker is then held responsible to independently remit self-employment taxes.
Furthermore, employees and independent contractors pay different tax rates. An employee’s paycheck automatically withholds federal income tax and FICA tax (Social Security and Medicare taxes). The federal income tax rate correlates with what exemptions the employee claimed on their Form W-4. With FICA payroll withholding, you withhold 7.65% of the employee’s wages (6.2% for Social, 1.45% for Medicare). Additionally, you also contribute a matching employer portion of 7.65% of their wages. This totals 15.3% for FICA.
Alternatively, with non-employee compensation, you do not withhold taxes from their pay. As a result, the independent contractor pays the self-employment tax rate of 15.3% of their wages. However, the worker pays more in self-employment tax since there is no employer.
What if There is Suspicion of Misclassification?
If there’s any suspicion that the worker was misclassified, either you or the worker can submit Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, to the IRS. This form requests that the IRS review the situation and make an official determination. Misclassifying workers comes with paying back wages, taxes, and possibly penalties and court fees.
Why are Companies Turning to Non-Employee Labor?
Across many industries, it is oftentimes much cheaper to hire temporary, non-employee labor, especially for companies that are seeking more flexibility and less risk. They want the ability to hire talent on-demand without the burden of full-time employment costs.
Furthermore, it is much easier for jobseekers to find a part-time job, especially in light of the current, post-Coronavirus economy. Being hired part-time can serve as a real confidence booster and a valuable way for people to build skills while waiting for the market to recover.
Managing Non-Employee Labor with Monument: A Highly Rated MSP
Are you still unsure of which on-demand talent platform to use? Consider partnering with our team of managed service providers (MSPs) at Monument Consulting to implement and internally manage your on-demand talent.
At Monument Consulting, we understand the importance of managing your contingent workforce in the most optimized and efficient manner. Therefore, our team uses vendor management systems to streamline our managed service provider services.
Additionally, we offer contingent workforce management consulting services to share our expertise with your staff on how to operate your contingent workforce at maximum efficiency. Our team at Monument will train your team how to operate with a VMS and help with your configuration evaluation, system integrations, and system enhancements to tailor the program to your industry and on-demand talent needs.
Are you looking to connect with Monument Consulting? Contact us today to ask about our contingent workforce consulting or managed service provider (MSP) services!