What’s Happening?
Government agencies are cracking down on worker misclassification. The Department of Labor (DOL) and IRS have been tightening their definitions, and states are rolling out stricter laws to ensure businesses aren’t misclassifying employees as independent contractors to avoid paying benefits and taxes. The IRS and Department of Labor are cracking down on contractor misclassification. The IRS uses the Common Law Test to evaluate whether someone is truly an independent contractor or should be classified as an employee. Learn more about how the IRS makes this determination. If you’re unsure how your current structure holds up, our Compliance & Admin Support for Contractors service helps you stay compliant and organized.
Under the new rules, many tradespeople who have always considered themselves independent might now be legally classified as employees. That could mean changes in taxes, benefits, and even how you can operate your business.
Understanding Worker Classification
Worker classification has always been a gray area, but new policies are pushing for clear-cut distinctions between employees and contractors. The IRS 20-Factor Test and the ABC Test are the two primary frameworks that determine your status.
- IRS 20-Factor Test evaluates behavioral and financial control.
- ABC Test requires proof that the worker operates independently.
If you fail these tests, you could be reclassified as an employee, affecting your tax obligations and work flexibility.
Misclassifying employees can lead to serious legal trouble and it’s not just about labels. You’ll also need to manage W-9s, 1099s, and W-2s correctly based on how your workers are classified.
Key Differences Between Contractors and Employees
| Feature | Independent Contractor | Employee |
|---|---|---|
| Work Schedule | Flexible | Set by employer |
| Taxes | Pays self-employment tax | Employer withholds taxes |
| Benefits | No benefits provided | Employer provides benefits |
| Control | Owns business operations | Company dictates work |
| Tools & Equipment | Provides own tools | Employer supplies tools |
How Does This Affect You?
If you’re running your own show, taking on multiple clients, and setting your own rates, these changes might make it harder to maintain that independence. The updated classification tests focus on factors like:
- Control – Does your client dictate how and when you work?
- Independence – Do you set your own rates and services?
- Integration – Is your work essential to the company hiring you?
Failing to meet the new standards could mean getting reclassified as an employee, which could impact your taxes, contracts, and income potential.
Potential Legal & Financial Impacts
If reclassified as an employee, you may face:
- Higher Tax Liabilities – Self-employment tax benefits may no longer apply.
- Reduced Flexibility – You may have to work fixed hours under company policies.
- Loss of Client Base – Some businesses may stop hiring independent workers.
- Eligibility for Benefits – Some contractors may gain access to health insurance and paid leave.
What Should Contractors Do Now?
- Review Your Contracts – Make sure your agreements clearly define your independence.
- Keep Business Separate – Have your own business structure, branding, and financial records.
- Stay Informed – Laws are changing fast, and you don’t want to get caught off guard.
- Speak with a Tax Professional – Get expert advice on how these laws affect your tax situation.
How SupportCrewe Can Help
Navigating these changes can be confusing, but you don’t have to do it alone. At SupportCrewe, we specialize in helping contractors and tradespeople stay compliant while keeping their independence. Our services include:
✅ Contract Review & Compliance – Ensure your contracts align with new labor laws.
✅ Business Structuring Assistance – Set up an LLC or other entity to protect your business.
✅ Tax & Accounting Support – Avoid misclassification penalties and manage self-employment taxes efficiently.
✅ Legal Resources Connection – Get access to legal professionals who specialize in contractor laws and compliance. “In January 2024, the Department of Labor released a new rule aimed at clarifying worker classification under the FLSA. Read the official DOL announcement here.”
With SupportCrewe, you can continue doing what you love without worrying about legal risks. Let us handle the paperwork while you focus on your trade!
FAQ: Common Questions About Contractor Classification
Q: How do I know if I’m an independent contractor?
A: If you control your work schedule and provide your own tools, you’re likely a contractor. Read more.
Q: What happens if I’m reclassified as an employee?
A: You may lose flexibility but could gain benefits like health insurance and retirement contributions. Learn More.
Q: How can I protect my independent status?
A: Clear contracts, proper business structuring, and working with multiple clients help strengthen your independent status. Get Expert Help.