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Employee vs.
Independent Contractor – Ten Tips for Business Owners
IRS Summertime Tax Tip 2009-20 August 21, 2009
If you are a
small business owner,
whether you hire people as
independent contractors or as employees will impact how much taxes
you pay and the amount of taxes you withhold from their paychecks.
Additionally, it will affect how much additional cost your business must
bear, what documents and information they must provide to you, and what
tax documents you must give to them.
Here are the top ten things every business owner should know about
hiring people as independent contractors versus hiring them as employees.
- Three characteristics are used by the IRS to determine the
relationship between businesses and workers: 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.
- 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.
- Employers who misclassify workers as independent contractors can end
up with substantial tax bills. Additionally, they can face penalties for
failing to pay employment taxes and for failing to file required tax
forms.
- Workers can avoid higher tax bills and lost benefits if they know
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 a Form SS-8 – Determination of Worker Status for
Purposes of Federal Employment Taxes and
Income Tax Withholding – with the IRS.
- You can learn more about the critical determination of a worker’s
status as an Independent Contractor or Employee at
IRS.gov by
selecting the Small Business link. Additional resources include IRS
Publication 15-A, Employer's Supplemental Tax Guide, Publication 1779,
Independent Contractor or Employee, and Publication 1976, Do You Qualify
for Relief under Section 530? These publications and Form SS-8 are
available on the IRS Web site or by calling the IRS at
800-829-3676 (800-TAX-FORM).
Links:
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