Business owners hire workers for many different jobs. Paying employees is different than paying workers who are self-employed. The biggest difference is in how taxes are treated. Self-employed workers are responsible for their own taxes and benefits, whereas employees are not. Hiring independent contractors can cost your business less, but the IRS disapproves of misclassifying workers.
When determining classification of workers, your business needs to look at the type of business relationship you have with the worker:
- How much control do you have over what the worker does?
- How will the worker be paid? Will expenses be reimbursed or not? Who provides the tools and supplies?
- Is the work a key aspect of your business? Do you provide benefits and contracts?
The IRS does not have a specific checklist to mark the difference between self-employed workers and employees, but it looks at the entire relationship. Therefore, your business might have a contract with someone identifying the person as an independent contractor, but if the business provides training and an evaluation system about how the work is performed, these factors would point to an employee, not a contractor.
Business owners can file Form SS-8 to request an official ruling from the IRS as to a worker’s status. Workers are also allowed to file this form. It does take about six months to get the ruling, but if there are questions about a worker’s classification, this can save you a lot of money in the long run. If you use the same type of workers a lot and want to make sure you have correctly classified them, this might be the way to go.
Find a solution
If you have misclassified an employee as an independent contractor, you may be liable for back taxes. It is a good idea to discuss your situation with a business attorney to find the best possible solution for your business and the employee. There are some programs being offered to help business owners avoid large fines and find relief from a misclassified employee.