Classifying Employees & Independent Contractors

Overview

Businesses with employees are subject to the Texas Unemployment Compensation Act (TUCA) and are liable to pay unemployment taxes. If workers are independent contractors, the employer is not liable to pay unemployment taxes on those individuals. Employers who misclassify employees as independent contractors may be subject to fines and increased taxes and interest charges.

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How to Determine if a Worker is an Employee or an Independent Contractor

If a worker’s service fits the TUCA definition of employment as outlined in Section 201.041, the individual is considered an employee. The law defines employment as a service performed by an individual for wages under an express or implied contract for hire, unless it is shown to the satisfaction of the Commission that the individual’s performance of the service has been and will continue to be free from control or direction under the contract.

The three essential elements of the definition of employment are service, wages, and direction and control. Direction and control can be present in an employment relationship even if the employer does not exercise direction and control, but retains the right to do so.

TWC uses a 20-point comparative approachPDFEnglish Estatus de Empleo – un Enfoque Comparativo PDF as a guide to determine if a worker is an employee or an independent contractor.

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Important Facts About Employee Classification

  • Employers are responsible for classifying workers correctly.
  • A worker who is called contract labor and whose wages are reported using IRS Form 1099 may not be an independent contractor.
  • Neither the business nor the individual may choose whether the worker is classified as a contractor or employee. The relationship between the parties and the presence of direction and control determine whether or not a worker is an employee or an independent contractor.
  • A written or oral agreement between the parties does not change the status of the worker.
  • Misclassifying a worker can cost the business in taxes and interest.
  • Misclassifying a worker can result in a fine of $200 per worker if the employer is operating under a government contract.
  • Misclassifying workers costs all Texas employers in the form of higher unemployment tax rates.

The Texas Workforce Commission offers guidance with questions about the classification of workers. Contact your nearest TWC tax office for assistance.

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How to Report Worker Misclassification

If you have information that a business is not classifying workers correctly, notify TWC by email to TaxTEU@twc.state.tx.us, or by phone for anonymous reporting. Include as much information as you can, such as the name of the business, name of the owner/officer, the physical location of the business and the type of workers that are being misreported to TWC.

If you wish to remain anonymous, instead of emailing call us at 512-463-2700. Deaf, hard-of-hearing or speech impaired customers may contact Relay Texas: 1-800-735-2989 (TDD) and 711 (Voice).

Once TWC receives an email message from you the message becomes part of the official record. The identifier that is inserted by your email service provider is included as part of the message and cannot be removed from the record (Texas Penal Code Chapter 37). The accused has a special right of access under the Public Information Act to review the official record and/or obtain copies of the record.

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