Question: An employer hired a worker as a nonemployee to work 20 hours per week at an agreed rate of $50 per hour. Before the worker started, the employer determined that the worker should be classified as an employee. How is the correct hourly wage computed so that the total cost for the worker remains at $50 per hour?

Answer: Determining the correct hourly wage can be a complex computation depending upon differences in the costs incurred by the employer and the worker when the worker is classified as an employee instead of an independent contractor.

The first step is to determine what constitutes the total cost under each scenario. Obvious relevant costs are employer payroll taxes, but there may be other costs such as workers’ compensation insurance, state disability insurance or paid sick leave, and other fringe benefits.

An employer’s assumption of costs or risks of loss that the worker would have incurred as an independent contractor might result in cost savings or additional benefits for the worker. For example, independent contractors generally do not have unemployment coverage and frequently must provide their own workers’ compensation coverage or tools.

Other employer-provided benefits also affect the computation. On the other hand, as an employee, the worker might incur additional costs such as union dues or lose deductions for unreimbursed expenses that, for a nonemployee, would be deductions from...

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