Is that person that provides services to your company an employee or independent contractor? The answer to this question has always been a contentious issue between businesses and federal and state governments. The primary reason for contention is that payment for independent contractors' services are not subject to payroll taxes, and payment for services of employees are. Therefore, independent contractor classification causes the government to lose much needed payroll tax revenue.
The determination of independent contractor status is largely dependent on the degree of control exercised by the business that engages the subcontractor. Basically, if the business controls when, where, and how the work is done, the person doing the work is an employee, not an independent contractor. The IRS has developed a list of twenty questions to assist in this determination. This list of questions can easily be found on the internet. Please contact me if you want me to send you a copy.
It has been our experience that disputes over independent contractor status have centered around services provided by individuals. The IRS and most states have generally respected arrangements where payments were made to other businesses for services provided by those businesses. Some examples of these types of relationships include landscapers, building cleaning and maintenance companies, and transportation (school and other bus) companies. However, it now appears that New Jersey Unemployment will no longer respect such arrangements. Authorized by NJSA 43:21-19(3)(g), NJ Unemployment auditors are classifying employees of other businesses as employees of the business under audit and assessing tax for the payments made to these businesses.
The final sentence of NJSA 43:21-19(3)(g) states "Each individual employed to perform or to assist in performing the work of any agent or employee of an employing unit shall be deemed to be employed by such employing unit for the purposes of this chapter...whether such individual was hired or paid directly by such employing unit or by such agent or employee; provided the employing unit had actual or constructive knowledge of the work."
Read it again and think about it. As long as you know that your grass is being cut or your office is being cleaned, New Jersey has the right to require your business to pay unemployment and disability tax on the payments for services that you make to the business performing such services. Practically, this provision will not be applied unless the subcontractor fails to comply with NJ Unemployment laws, but there is no mechanism to determine if subcontractors are in compliance. We recently had an audit where this law was applied. When asked how a business could determine if subcontractors are in compliance, the auditor's response was that before hiring a subcontractor, we should request copies of their NJ Unemployment Tax reporting forms. That is ridiculous! Would you share your confidential payroll information with a customer?
New Jersey doesn't understand why businesses are leaving and relocating to more tax and business friendly states. It is time to wake up, and stop trying to tax businesses out of existence.
