Employee vs. Independent Contractor? DOL Issues New Worker Classification Guidance Effective starting in 2024

By Scott Hennessy On May 21, 2024
Scott is a CPA & Manager at BSB.

New DOL Rule & Misclassification:

The U.S. Department of Labor (DOL) has issued a new rule that offers guidance for employers to determine whether to classify a worker as an employee or independent contractor under the Fair Labor Standards Act (FLSA).

Incorrect worker classification can:

  • Affect workers' rights to minimum wage and overtime pay
  • Have tax and withholding consequences

Effective March 11th, 2024, the rule voids the 2021 Independent Contractor Rule that, according to the news release, the DOL "believes is not consistent with the law and longstanding judicial precedent."

6 Factors for Determining Classification:

Employers are encouraged to consider six factors when determining a worker‘s classification:

  1. Any opportunity for profit or loss a worker might have;
  2. The financial stake and nature of any resources a worker has invested in the work;
  3. The degree of permanence of the work relationship;
  4. The degree of control an employer has over the person's work;
  5. Whether the work the person does is essential to the employer's business
  6. A factor regarding the worker's skill and initiative.

Tax Consequences:

When a worker is classified as an employee, the employer must withhold income taxes as well as Social Security and Medicare (FICA) taxes from the employee's paycheck.

  • The worker and the employer each contribute 7.65% of the worker's pay to pay the FICA taxes.
  • When a worker is classified as an independent contractor, the worker is responsible for remitting income tax and for the entire 15.3% FICA tax.

Worker classification also has Federal Unemployment Tax Act tax implications.

State governments receive contributions from employers to help fund programs such as unemployment and disability insurance for the portion of its workforce classified as employees but not for those classified as independent contractors.

If you're a business owner in the New York Metro Area and need help making the best decisions for your business, request a consultation with our experienced accountants today. We look forward to providing you service.

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