At a corporation as large as Yoh’s client is, it can be easy to misidentify the hundreds, sometimes thousands, of contractors and vendors going in and out the company’s doors each day. And as the business world has changed, with more people working in more places than ever, that complex process of ensuring independent contractor compliance has become that much more difficult.
With so many moving parts and new contractors of different types coming and leaving the organization regularly, Yoh needed to implement a strategy for correctly classifying, paying and policing the onboarding and offboarding process. After a complete audit of all existing contract workers, Yoh introduced a compliance questionnaire and checklist to identify and manage those individuals ahead of time, ensuring all IRS rules and qualifications were met, every time.
Following the introduction of the formalized contractor compliance process, Yoh not only made sure its client was compliant with all IRS regulations, but saved a bit of money too. Yoh provided market analyses for every single contractor role to make sure their compensation was on par with industry averages. Now with a full contract worker strategy in place, the client never has to worry about the tax issues or overpaying for work it receives.
308 billion U.S. dollars spent on enterprise software in 2015 alone
10% of the U.S. workforce is comprised of independent contractors
85% of independent contractors and self-employed professionals are content with their employment
26 states since July 2007 have enacted legislation intended to curtail misclassification of employees as independent contractors
For decades, independent contractors have been an integral part of what makes companies succeed. From programmers and engineers, to designers, writers, and more, these workers help to augment a staff with a certain skill that makes the most sense to add only for a short
And while the debate about contract workers rages on in the mainstream media, there is no debate about how integral they are to enterprises across the globe. For Yoh’s client, an international leader in the software space, independent contractors are critical to helping deliver and complete hundreds of complex projects each year efficiently and proficiently, every time.
But when the amount of contract workers employed each year continues to grow, it can be difficult to manage and identify who’s an independent contractor versus a freelance
worker versus a vendor versus a part-time employee. And with vastly different tax laws for the different classifications of contract workers, IRS penalties can be incurred simply by
mislabeling an individual worker.
So to shape up its contract worker identification process and ensure IRS and corporate compliance across each of its business units, the company called on its trusted Managed Services Provider partner, Yoh, to help save the day.
Dependent on Independents
According to the IRS, the general rule for independent contractor (IC) work is that an individual qualifies as an IC if the “payer has the right to control or direct only the result of
the work and not what will be done and how it will be done.” As a result, the earnings of ICs are subject to Self-Employment Tax.
While the IRS classifies these workers much more specifically and in more detail, each organization relies on ICs for vastly different reasons. For Yoh’s software client, they hire them when they have a project that requires a specialized skill set in order to be completed. Simply put, they join a project, do their job, and leave. There is no employer/employee connection that continues the relationship beyond the scope of the project and the worker is not working exclusively for one company.
And with so many projects going on at once in different areas of the globe, hiring expert workers to provide their unique skills is critical to ensuring projects get completed on time and maintain the high quality work output the company is known for. Though the process of hiring an IC may seem straightforward, it becomes increasingly complicated the more types of workers a company hires and the larger the company that hires them is.
Prior to Yoh revamping the company’s IC process, many ICs were lumped in with vendors, contractors and other types of workers/services (i.e. landscaping services, cleaning services, etc.) with no analysis being done to make sure ICs were labeled as such. To most, no big deal. To the IRS, huge deal. Mislabeling vendors as ICs and vice versa is a tax violation and runs the risk of incurring hefty fines as a result.
To prevent that from happening, the client called on Yoh to step in and make sure IRC compliance was confirmed.
Auditing to Prevent an Audit
Before installing a process for managing all the company’s ICs, over the course of 2-3 months Yoh audited the entirety of the client’s U.S. and Canadian employee database, analyzing which workers were full-time, part time, payrollees, ICs, vendors and other types of workers. Through the audit, Yoh identified a large population of
workers whose classification was misidentified and not going through the correct payment process.
Following the audit, Yoh installed an organization-wide classification system for correctly identifying and processing every independent contractor to work for the company. A
new 64-question checklist was introduced to analyze the job need and the potential worker presented for the job before getting hired to ensure compliance. This system not only prevented the client from the possibility of having to pay back taxes, but also established a standard process for paying the ICs correctly and on time. And if doubt ever arose as to the classification of a worker, hiring managers would show Yoh representatives any project IC resource needs before making a hiring decision to ensure complete compliance.
But the benefits didn’t end there – with Yoh, they rarely do. After identifying the organization’s ICs, Yoh also provided the client with a market analysis for every single one of those roles to make sure they were paid according to industry standards. Was the company overpaying ICs for their services? Yoh found out. Could the company find other
qualified ICs for a better price? Yoh let them know.
Not only did Yoh help the client realize cost savings because of this, but the systems that had been put in place to identify worker classification could be easily accessed for every new hire moving forward, assuring the company would never have an issue with the IRS as long as the processes Yoh introduced were followed.
Now managing hundreds of ICs per year, Yoh continues to vet, police and regularly audit the company’s employee base as part of its MSP work. Sure, the practice of introducing the new system may have been a bit taxing and unfamiliar at first, but now the company has complete confidence that the tax man will never come calling about an IC compliance issue.
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