I hear that statement almost every time my clients discover that they have been misclassifying employees who work at their barns or farms as independent contractors instead of what they are – employees. This problem seems to occur more often than usual in the farm context. I think part of the reason for the increased occurrence may be that the people we hire to help in the barn are working outside a lot where we probably do not see them very much during their shift (either because we are inside or elsewhere on the farm or off the farm at our job) and so they just do not “feel” like employees to us, so we say. Lots of folks tell me that it seems to them that a person working for you needs to be around a lot and under your regular visual supervision to “feel” like an employee. And we generally tell our barn folks what we need (e.g., hay twice a day, grain once a day, at least 4 hours of turnout for each horse every day, don’t put Chief and Buddy in the same field and so on) and then we pretty much leave our barn workers to figure out the details of how to accomplish those tasks. They might give hay in the stall or in the field when they turn out. They might give grain at noon or 3pm. Most of us do not usually micromanage our barn workers unless there are specific reasons that something needs to be more regimented.
Unfortunately, the IRS has a very broad definition of who should be classified as an employee and yes, I suspect that the IRS definition would include most barn workers I know. Why does it matter if you misclassify a person? Well, because you have to withhold and pay employer “payroll” taxes directly to the IRS on behalf of employees if you are an employer. If folks are independent contractors, they are responsible for paying their own income taxes and all you have to do from an income tax perspective as the one who hired them is send them a 1099 stating what you paid them for the year after the end of the tax year and perhaps, if appropriate, deduct what you paid them from your taxable income – very simple, right? Well, having employees creates another layer of work for the person hiring. You have to think about employer payroll taxes and pay them in a timely fashion or you can be personally liable for failing to do so. If you have employees, you have to think about things like unemployment tax and W-2s. So it costs you more and more work and thought is required to hire an employee than to hire an independent contractor, so most of us really would like for all our workers to be independent contractors. But it almost always benefits the worker to be classified as an employee because part of the payroll taxes employers have to pay includes a Social Security tax and other taxes that benefit the worker.
Fortunately, the IRS has set forth very specific criteria for us to consider when deciding whether we have an employee or independent contractor. See IRS Publication 1779 for the details, but I will give you a taste of what they are here. If your worker uses your equipment when doing his or her job and you “direct or control” the worker’s work, then the worker is more likely to be an employee. If your worker has made a substantial investment in a piece of specialized equipment which he uses when working on your farm and he also goes to other farms to use the same piece of equipment there, he may be more likely to be an independent contractor, depending on other circumstances. These two represent a couple of the general ideas at work here and the IRS Publication 1779 goes into more detail about what factors influence how your worker must be classified.
If you have a CPA or lawyer, he or she can be very helpful in determining whether your worker is an independent contractor or an employee. Being that personal liability does attach to unpaid payroll taxes, you want to be very careful to classify workers properly. No one wants a visit from the IRS demanding that you pay years of unpaid payroll taxes which you did not pay because you misclassified your employee as an independent contractor. So take heed and be careful classifying your barn and farm workers because if you are wrong, the remedy imposed upon you can be very expensive!
If you get into a bind and need assistance or just want to ask some questions to avoid getting in a bind, feel free to email me at firstname.lastname@example.org. I often will answer a short and simple question for free if I have time and know the answer off the top of my head! If you don’t hear back from me quickly, it’s not because I don’t love you or think you have a great question or because I don’t know the answer (usually), I’m probably just really busy and haven’t had a chance to email back. And you can always buy the first hour of my time for $250 (my usual hourly rate for 2014 is $325). Lots of folks will save up all their equine (and some corporate or real estate) legal questions and short documents and sit with me for an hour and we will do as much as we can during that hour and it’s only $250. You can check out my Twitter feed @nchorselawyer as well as our firm’s Equine Law Group web page at http://www.rl-law.com/equine if you’re interested, and yes, in addition to providing what I hope are interesting and informative stories, this blog and the Twitter feed referenced above are also (in one way or another, I guess) an advertisement for legal services.