Articles Tagged with “classification of employees”

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construction 9-10.JPGThere are severe civil and administrative penalties for misclassification of workers who should actually be employees as independent contractors. If a worker is classified as an employee, the employer must pay approximately an additional 7.5 percent of her salary in payroll taxes, as well as workers compensation insurance, and the benefits which other employees get. This gives businesses a strong incentive to classify workers as independent contractors. However, this has long been illegal under both federal and New Jersey Employment law.

New Jersey has found this practice to be widespread in the construction industry, depriving workers of benefits, social security taxes, and forcing the employer to pay self-employment tax, or the employer’s portion of the payroll taxes. Additionally, the New Jersey Legislature has found that this puts businesses currently classifying workers as employees at a competitive disadvantage with those whose do not because of the higher costs they bear. New Jersey therefore enacted the New Jersey Construction Industry Independent Contractor Act.
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Businesses with any New Jersey employees are responsible for withholding and paying income taxes, Medicare taxes, and Social Security, and paying payroll taxes on wages paid to their employees. However, in general, the same businesses do not have to do so when hiring independent contractors.

Therefore, it may be tempting for a business to classify all workers as independent contractors to avoid payments. However, the Internal Revenue Service and New Jersey Division of Taxation have stringent regulations to ensure that businesses correctly classify their workers. The IRS imposes significant penalties on businesses which have misclassified their workers as independent contractors.

A worker is an independent contractor if the “employer” has the right to direct only the result, but not the way in which the worker performs her job. For example, if a business hires a New Jersey attorney to sue another company for breach of a contract, the business does not direct the attorney on how to argue the case, what motions to file, etc. The client educates the attorney about the dispute and asks the attorney to work towards a certain result (recovering lost profits). Therefore, this attorney is a New Jersey independent contractor, not an employee.
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