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7 Tax Tips for Business Re. Employee v. Independent Contractor

Orange County tax attorneys know that if you are a small business owner you can hire people as independent contractors or as employees. How you classify the people you hire will affect how much you pay in taxes, whether you need to withhold from your workers' paychecks and what tax documents you need to file.

Following are seven tips every business owner should know about hiring people as employees as opposed to hiring them as independent contractors.

1. There are three characteristics that the IRS uses to determine the relationship between businesses and workers:

  • Behavioral Control: This is whether the business has a right to direct or control how the work is done through instructions, training or other means.
  • Financial Control: this is whether the business has a right to direct or control the financial and business aspects of the worker's job.
  • Type of Relationship: this is how the workers and the business owner perceive their relationship.

2. Your workers are probably independent contractors if you can direct or control only the result of the work done, but not the means and methods of accomplishing the result.

3. Your workers are probably employees if you have the right to control or direct not only what is to be done, but also how it is to be done.
  
4. Misclassifying workers as independent contractors can result in substantial tax bills. Also, there are penalties for failing to pay employment taxes and for failing to file required tax forms.

5. Business owners are not the only people for whom this is an issue: workers can avoid higher tax bills and lost benefits if they know their proper status.
 
6. 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.

7. If you visit IRS.gov and click the Small Business link, you can learn more about the critical determination of a worker's status as an Independent Contractor or Employee. 

Source: IRS.gov "Employee vs. Independent Contractor - Seven Tips for Business Owners" August 23, 2010

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