Accurate worker classification is a crucial matter for any business. Employment classification dictates whether the business needs to withhold taxes, pay unemployment tax and more.
Homeowner associations (HOAs) are nonprofit corporations. This means that HOAs are considered business entities under Texas law—and, as such, are required to correctly classify the people they hire.
Legal trouble, penalties and tax issues at stake
Negligence in ensuring correct employment classification may land your HOA in legal trouble. You may get cited for the misclassification and be required to pay the following:
- Financial penalties
- Backpay and overtime
- Employment taxes
- Unpaid benefits, including health coverage
Additionally, unpaid employment taxes often mean not filing the proper forms or documents to the Internal Revenue Service (IRS). This can potentially lead to additional problems with the IRS. The agency can impose more penalties, including:
- Up to $1,000 in criminal penalties per misclassified worker
- 100% of the employer’s federal payroll tax
- Up to 25% in unpaid total tax liability
How to distinguish employees from contractors
One way to distinguish whether you hired independent contractors or employees is to look at who sets the work schedule. If you set their work hours, they are likely an employee. If the person sets their own work hours instead, then they are most likely an independent contractor.
Independent contractors are self-employed—they are essentially business owners as well. They have greater control over their time, product or services and more. In many cases, payment is by the project, milestone or commission. Meanwhile, employees receive payment based on an hourly, daily or weekly rate.
Employees are more dependent on their employers. They follow stricter guidelines in doing their work and often receive training first. Moreover, employees generally do not get end dates, unlike contractors whose contracts usually specify a termination date.
Tips to minimize misclassification risk
Proper documentation of your workers, particularly the details of their work and payment, can help you determine how to classify them correctly.
If you are still confused over how to classify workers or are worried you might have misclassifying employees, it is a good idea to speak with a legal professional experienced in handling HOA and employment law matters.