Independent Contractor vs. Employee

Are your workers independent contractors or employees?  The answer can have a profound impact on how much tax you will pay as a small business owner.  Depending on whether or not your workers are considered employees, it will affect the amount of taxes that must be withheld from their pay, how much additional cost your business must bear, the documents and information that must be provided to you, and the tax documents that must be given to them.

Employers who misclassify workers as independent contractors can end up with substantial tax bills, as well as penalties for failing to pay employment taxes and filing required tax forms.  Workers can avoid higher tax bills and lost benefits if they are aware of their proper status.

Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

Generally, whether a worker is an employee or an independent contractor depends upon how much control you have as a business owner.  If you have the right to control or direct not only what is to be done but also how it is to be done, then your workers are most likely employees.  If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors. 

The three broad characteristics used by the IRS to determine the relationship between businesses and workers are:

• Behavioral control,

• Financial control, and

• The type of relationship. 

Behavioral control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means.  Financial control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.  The type of relationship factor relates to how the workers and the business owner perceive their relationship.

Knowing the proper worker classification can be critical to your business.  Please call this office with any questions you may have and make sure you are classifying your employees correctly.

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