Small businesses frequently hire people to work for them. Whether these hires are classified as employees or independent contractors impacts whether an employer must withhold income taxes and pay unemployment, Social Security, and Medicare taxes. Improperly classifying employees as independent contractors is an area of concern for the IRS, so small business owners should carefully review all classifications.
Distinctions between employees and independent contractors are frequently difficult for employers to analyze. To help, you should assess the employment relationship based on how much control you have over the worker.
A worker is an employee when you have the right to control how the worker performs their job. What is important is your right to control, not whether you choose to exercise it. Consider the following:
· Do you instruct when and where the person can work? Do you tell the worker where to buy supplies and services? If so, the worker might be an employee.
· How detailed are your instructions? The more detailed, the more likely the worker is an employee.
· Do you have an evaluation system in place to measure worker performance? If yes, then the worker is more likely an employee.
· Do you provide training on how to do work? This is proof that the worker is an employee.
No one factor is controlling, but the more behavioral control you have, the more likely the worker is an employee and not an independent contractor.
Also analyze whether you have the right to control the financial aspects of the worker’s job, looking at the following factors:
· Do you reimburse the worker’s expenses? Independent contractors are rarely reimbursed.
· How do you pay the worker? Independent contractors are more likely to be given a flat fee, while employees are more likely to be paid an hourly or weekly wage.
· Is the worker free to work for someone else? Independent contractors usually can get additional work from other clients. If not, then the worker might be an employee.
Also look at how you and the worker view and treat your employment relationship. Important considerations include:
· Does your contract state whether the worker is an employee or an independent contractor? This is some evidence of the relationship.
· Do you provide benefits, like health insurance or a pension? Independent contractors usually do not receive these benefits.
· How permanent do you see the relationship? Long-term relationships usually indicate the worker is an employee.
· How important are the services the worker provides to your business? The more central, the more likely the worker is an employee.
Seek Help Correcting an Improper Classification
If you have erroneously classified an employee as an independent contractor, you will be responsible for employment taxes. However, eligible businesses might qualify for the Voluntary Classification Settlement Program, which allows businesses to reclassify employees and receive partial relief from employment taxes. You should visit the IRS website for more information about the program.
Contact an Atlanta Tax Lawyer
If you have questions about worker classification, you should contact an IRS tax lawyer now. Jeff Cohen, Attorney at Law, has helped countless businesses with their tax needs and is available to help. Call for a free consultation at 404-814-0000 or fill out an online contact form.