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3 questions to ask when classifying a worker

Recently, we discussed tax and employment liability concerns that come up when employers misclassify workers. What do small and mid-size employers need to consider when bringing on additional staff?

This initial consideration is crucial to get right. While the Internal Revenue Service has faced budget cuts, worker classification has remained a highly audited area. The independent contractor versus employee decision affects whether you will need to withhold and submit payroll taxes, such as income tax, Social Security, Medicare and unemployment tax. 

Answer these questions to avoid red flags

The general definition of an independent contractor is broad and includes self-employed individuals who provide services to others.

But the agency provides more guidance for business owners that can prove helpful. One major issue is who has control over the work. Based on the common law rules, ask these questions:

  1. Does the worker decide when and how to complete the job?
  2. Will you review bids prior to hiring for a project? Who will provide the resources to complete the work?
  3. How should you address the nature of the relationship in a contract?

Other things to think about are whether the individual does similar work for other companies or has a website advertising certain services.

The answers to these questions will inform how you classify different types of workers who you need to bring on to complete projects as your company grows. Speaking with a tax attorney prior to negotiating a contract is the best way to minimize risk.

If on the other hand, you receive correspondences from the IRS questioning a classification, you need immediate legal assistance. A tax attorney can advise on available options to reduce penalties and help bring your company back into tax compliance.

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