CWS 3.0: November 14, 2012

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Outsourcing Payroll: Taming a Risky Business

Companies that use independent contractors are well aware of the associated risks. The costs of a misclassification determination alone are staggering. At the same time, according to the IRS, 46 percent of independent contractor classifications reviewed by the agency are determined to be misclassified and one in three companies fail a worker classification audit.

Companies whose contractors are re-classified as employees by the IRS must provide them the same benefits that are available to their permanent employees and may be on the hook for retroactive fines and benefits claims.

That is the bad news. The good news is that the flexibility, specific skill sets and cost advantage that these workers bring to the table are unparalleled. And there are options to alleviate the risks, among them payroll outsourcing.

The Payrolling Advantage
A payrolling company manages the payroll and contracts with independent contractors, freeing the client company to provide direct instructions, training, tools and materials to the worker; invest in facilities provided to the contractor and hire and control the IC’s assistants. The company may request on-site services and specify the sequence of work to be done, set the worker’s hours, request a particular consultant for the project and request reports from the contractor — all factors that the IRS would otherwise use to determine an employer/employee relationship.

Payroll agencies can work as a contracted vendor to manage incorporated consultants or to establish employment agreements (W-2) with temporary employees to work on your projects, adjusting to your seasonal trends and flexible requirements.

The agencies can manage the W-2s or 1099 confirmed incorporated status of the individuals and payroll deductions, while you manage one vendor – the agency, by consolidated invoice.

Confirming 1099 incorporated status and eligibility is becoming more challenging every year, as is managing payroll taxes. Payrolling agencies can manage those for you, freeing you to concentrate on the project or the seasonal requirements and on your business.

For companies using a contingent workforce, payroll outsourcing can be the bridge between the company and the contractor and therefore can eliminate payroll tax risks of employing independent contractors, protect companies from co-employment issues and the improper engagement of independent contractors. Payrolling can provide the necessary systems for the effective management of an independent contractor base. This includes all governmental compliance requirements associated with the use of sole-proprietors, partnerships, incorporated entities, temporary workers, garnishee administration and consent judgments.

If companies want access to the talented independent contractor pool, outsourcing payroll is one way to go. It’s an effective business strategy that may help you tap the right candidate and keep your company compliant.

Meeta Bedi is an account manager at Zylog Systems Canada and a subject matter expert on contract management and payrolling services for the contingent workforce. She can be reached at meeta.bedi@zylog.ca.

 

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