Common Law Rules

• Common law rules, as outlined by the Internal Revenue Service (IRS), help employers determine whether a worker is an employee or a subcontractor. How much control an employee has over his job is one consideration. Others include the amount of job-related expenses the worker incurs and how much power he exercises over retirement planning, holiday pay and insurance. The more control the worker has over these factors, the more likely he is an independent contractor.
  
  

Worker's Compensation for an Employee

• Each state has a worker's compensation board to determine the cost of worker's compensation for a particular occupation. Different states calculate rates using a similar process, although the final figure varies with each state.
  
  Every occupation carries its own risk classification, determined by the frequency of receiving a job-related injury, and the injury's severity. Medical payments and indemnity benefits, which compensate the employee for losses suffered due to injury, serve to measure injury severity. For example, being a roofer carries a higher risk classification than that of being a receptionist.
  
  

Determining Worker's Compensation

• The risk classification for a job is converted to a dollar amount, then multiplied by 1 percent per $100 of the employee's total salary to obtain the worker's compensation base rate. For example, a risk classification of two is converted to $2. Multiplied by 1 percent of a monthly salary of $1,500 ($15), the workers compensation monthly base rate is $30.
  
  The base rate is not the final amount to which an employee is entitled. It can vary based on factors like the employer's safety history and the availability of workplace health insurance.
  
  

Worker's Compensation for an Independent Contractor

• An independent contractor is someone who works for another person and defines his own work hours and methods. Unless explicitly stated in an agreement, the contractor is essentially his own boss and ineligible for worker's compensation.
  
  However, just as base rates for worker's compensation may vary between states, employers in some states are required to provide worker's compensation even for independent contractors. This limits the type of civil action a worker can file against the employer should injury arise in the course of employment.
  
  

Implication of Worker Misclassification

• Some workers are classified as independent contractors even though the degree of control exerted by the employer and degree of independence conferred on the worker is similar to that of an employee. This may be an attempt to cut back on expenses but government audits that find employers guilty of worker misclassification can result in hefty financial penalties for the employer.
  
  In addition to the IRS, the state revenue department, worker's compensation company and state unemployment agency can audit a company suspected of worker misclassification. The employer can be held liable for several years of back taxes, and interest accrued.