Many business owners hire workers as either independent contractors or as employees. Correct classification of these workers will affect how much those business owners will owe in taxes, and whether or not there should be withholding from the workers' paychecks. There are also differences in the tax documents that need to be filed regarding each type of worker.
The following tips are on the differences between employees and independent contractors.
There are three factors the IRS uses to define the relationship between a business and its workers:
- Behavioral Control - this has to do with whether the business can direct and control how the work is done.
- Financial Control - this has to do with whether the business can control the business or financial aspects of the worker's job.
- Type of Relationship - this relates to the perception by the worker and by the business of what the working relationship is.
When the business controls what is to be done, and HOW it is to be done, then the workers are probably going to be considered employees.
If the business controls the results of what work will be done, but not the methods or means of doing the work, then the workers will probably be considered independent contractors.
The point of making an accurate determination is that misclassification of workers as independent contractors can lead to a substantial tax bill, serious penalties for failing to pay payroll taxes, and penalties for failing to file required tax documents.
It is to workers' advantage also to have a proper classification, so that they do not lose out on taxes and benefits that would be more beneficial under the proper classification.
Orange County tax attorneys point out that businesses and workers can request a determination of the correct status from the IRS by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
Source: irs.gov "Employee vs. Independent Contractor - Seven Tips for Business Owners" 8/2010