Contracting is the new black of employment models. Today there are 10 to 15 million contractors working in the U.S. That number is expected to grow. One of the complexities inherent in working with contractors is how to reimburse them for expenses. Reimbursing employees is difficult enough; companies struggle even more with organizing around contractor reimbursement. Here’s the problem and how an employer of record could help.
The Complexities of Contractor Reimbursement
Have you heard about California’s new Assembly Bill 5? At the beginning of 2020, the state reclassified many independent contractors as employees and required that many companies provide reimbursement for things like vehicle mileage. Whether other states will follow suit remains to be seen, but in the meantime, companies that had never provided reimbursement before had to scramble to set up systems to handle the influx of receipts and payments that the law forced upon them.
One of the most basic rules of the employer/worker relationship is how the employee is classified. The IRS and the Department of Labor have standards, but state courts and lawmakers have added nuances—and the rules are still evolving. HR teams are trying to stay on top of these changes, but the tests for whether a worker is a contractor or an employee are still being set. One thing that is established is that companies will be fined big money if they get this wrong. Just ask Microsoft, who reached a settlement of $96.89 million, then had to pay another $27.13 million in legal fees because they misclassified their labor pool.
How to Handle Contractor Reimbursement
Just one of the complexities within the snarl of laws regulating the employer/employee relationship is how you handle contractor reimbursement. Whether it’s a payment for services rendered or the reimbursement of an expense, this is an area of labor law and taxation that remains complex and ever-changing.
Companies struggle in this area, especially if they’re a small business and reimbursing within a manual process. When you are reimbursing a contractor, you must:
- Document the transaction by providing a recorded accounting of these costs.
- Account for these costs for tax purposes.
- If you’re reimbursing for mileage, track the standard mileage rates (which can change yearly).
- Process receipts and generate individualized checks in a timely manner.
- Retain documentation for if you’re audited.
The rules you must follow vary between states, so if you’re using contractors based in multiple states, you must track any regulatory changes and follow specific rules or run the risk of being fined. Then there are issues for you to comply with corporate taxes.
Companies seeking new ways to handle the frustrating complexities of contractor reimbursement can always turn to FoxHire. We offer our clients a full travel and expense reimbursement feature within our platform. Contractors can upload receipts to their digital portal when they have them. The receipts are logged and then go to the business owner with the contractor’s timesheet each week. As long as the client approves those expenses, then the contractor is paid. The contractor and employer can keep track of those receipts through an easy to understand dashboard on their individualized digital portal.
Partner With FoxHire
FoxHire has the solution to track all of your complex employee relationships. Outsourcing to our firm can save you time, money, and lessen the risk that you’ll run afoul of the latest employment laws changes. Contact us for a demo today!