If you are in need of a South Carolina employment law attorney or lawyer, I provide a low-cost initial one-hour telephone consultation to prospective clients for only $45.00. To request a consultation, click here.
Why consult with a South Carolina employment contract lawyer?
Federal statistics prove that employers, in general, are more likely to be sued by an employee than by a third party. For this reason, it cannot be emphasized enough that employers need to exercise great diligence in their relations with employees, including how to proceed with background checks, prohibited interview questions, applicability of the South Carolina Wage Payment Act, having clear employment agreement terms and policies, as well as knowing basic prohibitions regarding discriminating on the bases of sex (including pregnancy, childbirth, lactation, and related conditions) sexual harassment, race, color, religion, national origin, age (40+), disability and genetic information, and retaliation for filing complaints or participating in an investigation
Being able to evidence that an employee knew of am employment policies but violated it anyway can often make the difference between an employer having to pay unemployment security payments to a problem employee or not. I will be happy to advise you on the employment applications, agreements, policies, labor law posters, and other documents most appropriate to your business.
Understanding the distinctions between employees, statutory employees, and independent contractors is crucial for employers and workers alike. These categories determine various legal rights, responsibilities, and tax obligations under both South Carolina law and federal law. This guide will provide a detailed overview of these classifications, referencing relevant statutes, regulations, filings, and laws, including those that apply based on the number of employees.
1. Employment Classification: Employees, Statutory Employees, and Independent Contractors
a. General Classification and Importance
Employee:
An employee is someone who works for an employer under an agreement, whether written or implied, and is subject to the employer’s control and direction. The employer typically withholds income taxes, social security, and other employee benefits.
Statutory Employee:
A statutory employee is an individual who is not considered a traditional employee but is treated as one for tax purposes due to the specific statutory provisions under federal law or state law.
These workers often do not meet the general criteria of an employee but are still subject to withholding for Social Security and Medicare taxes.
Independent Contractor:
An independent contractor is a self-employed individual who provides services to others under terms specified in a contract. They control how, when, and where the work is done and are not subject to employer withholding for taxes, benefits, or other employee protections.
b. Key Differences Between Employees and Independent Contractors
Control and Independence:
The key factor in determining whether someone is an employee or independent contractor is the degree of control the employer exerts over the worker. Employees typically follow the employer’s direction, while independent contractors retain control over their work.
Tax Withholding:
Employees have taxes withheld by the employer for federal income tax, state income tax (if applicable), Social Security, and Medicare.
Independent contractors are responsible for paying their own self-employment taxes and filing their own tax returns.
2. South Carolina Law: Employment Classifications
a. South Carolina Employment Law:
Employment Contracts (S.C. Code Ann. § 41-1-10):
South Carolina recognizes employment contracts but does not have specific laws governing employee classifications outside federal standards. The state generally defers to federal criteria for employee vs. independent contractor determinations (discussed later under the IRS guidelines).
State Unemployment Insurance (SUI):
South Carolina provides unemployment insurance (SUI) benefits to employees through the South Carolina Employment Security Law (S.C. Code Ann. § 41-27-10). Independent contractors are not eligible for SUI, and employers must ensure proper classification to avoid misclassification claims.
Workers’ Compensation (S.C. Code Ann. § 42-1-130):
Employees in South Carolina are entitled to workers’ compensation benefits if injured on the job. Independent contractors are not covered by workers’ compensation laws unless they are specifically included by the contract or statute.
Statutory employees in South Carolina are eligible for workers’ compensation, even if they are technically independent contractors by other standards.
Wage and Hour Laws (S.C. Code Ann. § 41-10-10):
South Carolina’s minimum wage laws and overtime provisions apply to employees but not to independent contractors. Employers must comply with these standards for employees but are not responsible for ensuring minimum wage or overtime protections for independent contractors.
3. Federal Law: Employment Classifications
a. Internal Revenue Service (IRS) Guidelines
The IRS has a primary role in determining whether a worker is an employee or an independent contractor. The classification impacts tax filings, employment tax obligations, and eligibility for benefits like Social Security, Medicare, and unemployment insurance.
Employee vs. Independent Contractor Test (IRS Form SS-8):
The IRS uses the “Common Law Rules” to determine whether a worker is an employee or an independent contractor. These rules primarily focus on the degree of control the employer has over the worker. The IRS looks at three main categories:
Behavioral Control: Does the employer have the right to direct and control how the work is done?
Financial Control: Does the employer control aspects of the worker’s financial matters, such as the method of payment or provision of equipment?
Type of Relationship: Does the worker receive benefits such as health insurance, paid time off, or a continuing relationship with the employer?
Form SS-8 is available for employers or workers to request a determination from the IRS about the worker’s status.
1099 vs. W-2 Filings:
Employees receive a W-2 form, with the employer withholding federal income tax, Social Security, and Medicare taxes.
Independent contractors receive a 1099-NEC form, reporting the amount paid to them. They are responsible for paying self-employment taxes.
b. Fair Labor Standards Act (FLSA) (29 U.S.C. § 201 et seq.):
The FLSA applies to employees and establishes minimum wage, overtime pay, and recordkeeping requirements. Independent contractors are not covered by the FLSA.
The FLSA uses a “economic realities” test to determine if a worker is an employee. This includes the level of control exerted by the employer and the worker’s dependence on the employer for financial support.
c. Federal Unemployment Tax Act (FUTA):
FUTA applies to employers with one or more employees and requires the payment of unemployment taxes for employee wages. Independent contractors are not included in FUTA tax payments.
4. Statutory Employees: Special Classifications
a. Statutory Employees Under Federal Law
IRS Definition (IRC § 3121(d)):
Under Section 3121(d) of the Internal Revenue Code, certain workers who would typically be considered independent contractors are classified as statutory employees for tax purposes. This includes:
Drivers (for food, fuel, and other products) who are under contract with the employer to deliver goods.
Full-time life insurance salespeople.
Certain home workers.
Certain traveling or city salespeople who solicit orders for goods and services.
Statutory employees are treated as employees for Social Security and Medicare tax purposes but are not employees for income tax withholding.
Tax Filing for Statutory Employees:
Statutory employees must receive a W-2 form, but they can deduct business expenses related to their work on Schedule C, just like independent contractors.
b. Statutory Employees Under South Carolina Law:
South Carolina follows federal law regarding statutory employees, meaning that workers falling into the categories defined by the IRS (e.g., certain drivers, insurance salespeople) will be treated as employees for tax purposes under state law.
5. Filing Requirements Based on Number of Employees
a. Federal Filing Requirements:
Employer Identification Number (EIN):
Employers must obtain an Employer Identification Number (EIN) from the IRS to file taxes and reports. This requirement applies whether the employer has one employee or 100.
FUTA and FICA Taxes:
Employers with one or more employees must comply with Federal Unemployment Tax Act (FUTA) and Federal Insurance Contributions Act (FICA), paying taxes for Social
Security and Medicare.
Form 941 – Quarterly Tax Filings:
Employers with employees must file IRS Form 941 quarterly to report federal income tax, Social Security, and Medicare taxes withheld from employees’ wages.
Form 1099-MISC or 1099-NEC:
For independent contractors paid $600 or more, employers must file Form 1099-NEC.
Form 1095-C (Applicable to 50+ Employees):
Employers with 50 or more full-time employees must comply with Affordable Care Act (ACA) reporting requirements, including filing Form 1095-C to report healthcare coverage.
b. South Carolina State Filing Requirements:
SUI Tax Filings:
Employers with one or more employees must file South Carolina Department of Employment and Workforce (DEW) reports and pay South Carolina Unemployment Insurance (SUI) taxes.
State Income Tax Withholding:
South Carolina requires employers to withhold state income taxes from employees’ wages. Employers must file Form WH-1605 with the South Carolina Department of Revenue.
Workers’ Compensation Insurance:
South Carolina law requires that employers with four or more employees must carry workers’ compensation insurance unless they are specifically exempt.
6. Conclusion
Employment classifications (employees, statutory employees, and independent contractors) have significant implications under both South Carolina law and federal law.