Tax Insights

This is inevitably one of the first questions that come to a small business owner’s mind when they hire someone to provide services. Many employers just want to do what is easiest. What they could find out later is that the easiest thing can end up being the costliest.

Employers should be aware of the factors that the IRS looks at to determine who is an employee and who is an independent contractor. Guidance can be found at http://www.irs.gov/business/small/article/0,,id=99921,00.html.

The IRS has also recently compiled the following top ten list that business owners should know before classifying their workers:

1. Three main characteristics are used by the IRS to determine the relationship: behavioral control, financial control, and the type of relationship.
2. Behavioral control looks at the facts of whether the employer has a right to direct/control how the work is done through instructions, training, or other means.
3. Financial control looks at whether the employer has a right to direct or control the financial and business aspects of the worker’s job.
4. The type of relationship looks at how the worker and the employer perceive their relationship.
5. 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.
6. 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.
7. Employers who misclassified workers as independent contractors can face penalties for failing to pay employment taxes and for failing to file required tax forms.
8. Workers can avoid higher tax bills and lost benefits if they know their proper status.
9. 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: http://www.irs.gov/pub/irs-pdf/fss8.pdf.
10. Additional help can be found at: Small Business/Self Employed Tax Center on the IRS website: http://www.irs.gov/business/small/index.html.

IRS Publication 15-A (http://www.irs.gov/pub/irs-pdf/p15a.pdf)
IRS Publication 1779 (http://www.irs.gov/pub/irs-pdf/p1779.pdf)
IRS Publication 1976 (http://www.irs.gov/pub/irs-pdf/p1976.pdf)

Jeremy Smith, CPA