Over the past few years, there has been significant attention focused on the proper classification of an employee versus an independent contractor. This is essential to maintaining compliance with state and local regulations. However, this can prove challenging because each state makes its own classification rules and corresponding tax regulations. Many workers who previously were treated as employees are now treated as independent contractors due to constantly changing regulations. While federal rules have not changed significantly, state rules are regularly updated causing compliance concerns for many. Improperly classifying a worker can lead to employment tax complications including fines and penalties. To help clients, prospects, and others, WhippleWood CPAs have provided a summary of the key details below.
Colorado Independent Contractor Rules
In the state, the law assumes a worker is an employee until it is demonstrated the individual is free from control and direction in the performance of services. In addition, there must also be evidence both in the contract and the fact that the individual is regularly engaged in an independent trade or profession related to the work performed. In other words, a worker will be treated as an employee until established otherwise by a Colorado employer.
There is an exception that shifts the burden of proof to the state. This occurs when an employer uses a written document or contract to define the work arrangement. Assuming the contract meets legal requirements then the worker would be classified as an independent contractor until proven otherwise by the state. The following provisions should be included in a contract including:
- The company does not require the individual to work exclusively for the person for whom services are performed.
- The company does not establish a quality standard for the individual, except that such person can provide plans and specifications regarding the work but cannot oversee the actual work or instruct the individual as to how the work will be performed.
- The employer does not pay a salary or hourly rate but rather a fixed or contract rate.
- The company cannot terminate the work during the contract period unless the individual violates the terms of the contract.
- The company does not provide anything more than minimal training.
- The employer does not dictate the time of performance, except that a completion schedule and a range of mutually agreeable work hours may be established.
- Payment is not made to the individual personally but rather makes checks payable to the trade or business name.
Additional Tax Considerations
Many businesses receive services from individuals who work remotely in other cities and states. If those service providers are deemed to be employees, it creates a physical presence in the state that meets all nexus standards. Once formal nexus is established there are additional obligations to consider, including:
- With an employee in the state, the company is treated as doing business in the state. If the business is formed as a corporation, LLC, or other limited liability form of entity, it must register with the Secretary of State as a foreign entity.
- The physical presence causes a sales tax nexus. The company has a responsibility to collect sales taxes from any sales of taxable items in that state.
- The physical presence causes income tax nexus requiring an income tax return to be filed.
- The company is responsible for payroll taxes including state income tax withholding and unemployment taxes.
- The business is responsible for workers’ compensation coverage for the employee.
The employee vs. independent contractor decision is one that Colorado businesses need to carefully consider. Since each state has separate rules and regulations guiding a decision, it is essential to consult with a qualified tax advisor to determine how you will be affected. If you have questions about the information outlined above or need assistance with a tax or accounting issue, WhippleWood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.