Many Christmas tree growers hire additional help for harvest season. The end of the year is the busiest time for both wholesale and choose-and-cut Christmas tree growers. Harvest season is full of countless tasks, including tagging, selling, shaking, and baling trees.
The rest of the year is also a lot of work. Planting seedlings, controlling weeds and insects, mowing, shearing, and other farm tasks can be extremely time-consuming.
Most Christmas tree growers hire workers to assist around the farm because of the many time-intensive farm tasks. Other than hiring the right people, one of the most important labor decisions a grower will make is if workers are employees or independent contractors.
Employees v. Independent Contractors
The main financial difference between employees and independent contractors is responsibility for employment taxes. Employment taxes (often referred to as FICA taxes) are levied at the rate of 15.3% on qualified earnings and mainly fund Social Security and Medicare. In an employment relationship, the employer is responsible for paying half of the employment taxes (7.65%) and the employee is responsible for paying the other half. Independent contractors are not employed and must pay the entire 15.3% employment taxes out of their own pocket.
Businesses often prefer to use independent contractors due to the lower tax burden. Additionally, independent contractors often create fewer recordkeeping and regulatory issues. However, the determination of whether workers are independent contractors or employees can be convoluted. Wrongly classifying employees as independent contractors can result in large penalties and back taxes from the IRS. Therefore, Christmas tree growers must classify their workers correctly to avoid tax issues.
Employment Classification Factors
General Factors
There are three general factors to review to determine if a worker is an employee:
- Behavioral control
- Financial control
- Type of relationship
Behavior control exists if the business has the right to direct and control how workers perform their tasks. Frequently, behavioral control is achieved if workers must follow instructions about how their work should be performed. Some examples include when and where to do the work, what tools or equipment to use, what workers to hire or assist with the work, and what order or sequence to follow. A high level of behavioral control indicates an employment classification.
Financial control typically exists if the business has the right to control the business aspects of the workers’ job. Employees are typically paid regularly, have few unreimbursed business expenses, and do not make their services available to the relevant market. Independent contractors are generally paid by the job, have many unreimbursed expenses, and make their services available to the public.
Relationship type can be determined by looking at any written contracts describing the relationship between the business and worker, if the business provides the worker any employee-type benefits, and the permanency of the relationship.
Even if a contract says a worker is an independent contractor, the contract language does not necessarily supersede the other factors. All factors must be considered when determining the type of relationship. A relationship continuing indefinitely with benefits can indicate an employment relationship despite a written contract saying otherwise.
Specific Factors
Since the three factors discussed above are broad, the IRS has released a list of 20 specific factors they review when determining if a worker is an employee (see Revenue Ruling 87-41 for the entire list). The factors most relevant to Christmas tree growers are:
- Setting the hours of work
- Working on employer premises
- Setting the order or sequence of work
- Paying the worker by the hour, week, or month (as opposed to by project)
- Furnishing the worker’s tools and materials
- Hiring, supervising, and paying assistants
There is no set number of factors that determines if a worker is an employee. The IRS weighs the factors on a case by case basis when making a worker classification decision. Often, a worker performing the same task can be classified differently depending on the relationship between the worker and the business.
Shearing Example
For example, a Christmas tree grower hires an individual to shear trees. If the individual is already a skilled shearer, will use his own equipment, will decide the order in to shear the trees, and will be paid only when all the trees are sheared, these factors indicate the worker is an independent contractor.
However, if the same individual is hired to shear trees, but uses the Christmas tree grower’s tools, is required to work set hours, shears the trees per the grower’s strict instructions, and is paid weekly, those factors indicate the individual is an employee.
Proper Recordkeeping
If workers are independent contractors and earned $600 or more, a form 1099-MISC showing the amount paid to the worker must be filed with the IRS.
If workers are employees, the employer must withhold and remit employment taxes from each paycheck. Also, a form W-2 must be filed with the IRS yearly. An employer is typically required to pay Federal and state unemployment taxes on wages paid. Additional liability insurance may also be necessary if workers are employees.
Conclusion
Although correct worker classification is extremely important, it can also be confusing. The information above is brief overview of worker classification and there are many more nuances that make a difference in how a Christmas tree grower will classify workers. Each individual grower’s situation is different, so I recommend consulting with a tax professional to determine the correct worker classification for your Christmas tree farm. If you need help determining the correct classification for your Christmas tree farm workers, contact me!
