A Wisconsin independent contractor agreement is a contract made between an employer conducting business in the state of Wisconsin and an independent worker who is not an employee of the company.

It's important for the worker as well as the company to know whether they are classified as an employee or an independent contractor. Many businesses hire independent contractors instead of standard W-2 employees for a variety of reasons, and the rights and responsibilities of both parties differ under the two different relationships.

Businesses are generally not liable for workplace injury or tax payments for independent contractors. Businesses hiring independent contractors also need not worry about issues like unemployment insurance taxes, compensation premiums, and tax withholdings.

As a business, you may find it tempting to use the services of independent contractors instead of regular employees. However, you don't get to choose how to classify your employees; it must be done correctly according to certain rules and regulations.

Why Proper Classification Is Important

Proper classification is critical for determining a worker's eligibility for pension, compensation, overtime wages, and several other matters.

Employers are responsible for properly classifying their workers. Incorrectly classifying your workforce can make you liable to pay additional taxes and penalties in the state of Wisconsin. Moreover, a stop work order may be issued against employers in the construction business.

Even if a worker has signed an independent contractor agreement, the employer cannot use the agreement to escape their liability. The state of Wisconsin uses a list of factors to decide whether a certain worker is an employee or an independent contractor.

According to a recent clarification issued by the Department of Labor, most of the workers under the Fair Labor Standards Act (FLSA) are employees. The classification must be done based upon the nature of the relationship, and employers found guilty of misclassification can face stiff penalties.

In certain situations, it may become difficult to differentiate between an employee and an independent contractor. Moreover, different rules apply to government agencies, nonprofits, and trucking or logging businesses.

Strict Nine-Point Test for Wisconsin Independent Contractors

Although federal law may govern in some situations, most often, classification can be done based upon state law, especially in the areas of workers' compensation, unemployment tax liability, and wage and hour requirements.

For the purpose of workers' compensation, the state of Wisconsin determines a worker's status using a strict nine-point test. In order to be classified as an independent contractor and hence be exempt from compensation coverage, a worker must meet all the nine conditions listed below:

  • The worker must operate a separate business.
  • The worker must have a Federal Employer Identification Number (FEIN) or must have filed a business tax return with the IRS in the previous year.
  • The worker must operate under a specific contract.
  • The worker must be responsible for operating expenses.
  • The worker must be accountable for performance of the work.
  • The worker must be paid on the basis of contract, job, bid, or commission.
  • The worker must be subject to profit or loss from performing the work.
  • The worker must have recurring business obligations.
  • The worker's position must be such that he either succeeds or fails if his business expenses exceed his income.

According to the Wisconsin Supreme Court's ruling, an individual who fails to meet any of these nine requirements is not an independent contractor.

Being an Independent Contractor vs. Being an Employee

An independent contractor has more freedom in choosing how to complete his work. However, on the flip side, the company will not pay his taxes or cover him under the employees' health insurance policy. However, he can contribute to the unemployment and workers compensation funds and use those benefits.

An employee is under the control of his employer, but he gets to have certain benefits like workers' compensation, health insurance, and unemployment benefits.

A contractor may not have certain legal rights given to an employee. For instance, most of the federal laws for preventing discrimination in the workplace do not cover contractors. Similarly, unlike an employee, a contractor is not entitled to receive overtime wages and minimum hourly wages.

An employer deducts the payroll taxes while paying wages to an employee, but the payment made to a contractor is not subject to such deduction. Contractors whose earnings exceed a certain amount are liable to pay self-employment tax.

For these reasons, it is important to know whether or not you or your employees are being properly classified.

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