Employee vs.
Independent Contractor
Home
Services
Resources
Special Reports
Links
Tax Tips
Hot Topics
About Us
Tax Tips Home
Employee vs. Independent
Contractor – Ten Tips for Business Owners
If you are a small business owner, whether you hire
people as independent contractors or as employees will impact how much taxes you
pay and the amount of taxes you withhold from their paychecks. Additionally, it
will affect how much additional cost your business must bear, what documents and
information they must provide to you, and what tax documents you must give to
them.
Here are the top ten things every business owner should
know about hiring people as independent contractors versus hiring them as
employees.
-
Three characteristics are used by the Internal Revenue Service to determine the relationship
between businesses and workers: Behavioral Control, Financial Control, and
the Type of Relationship.
-
Behavioral Control covers facts that show whether the business has a right
to direct or control how the work is done through instructions, training or
other means.
-
Financial Control covers facts that show whether the business has a right to
direct or control the financial and business aspects of the worker's job.
-
The Type of Relationship factor relates to how the workers and the business
owner perceive their relationship.
-
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.
-
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.
-
Employers who misclassify workers as independent contractors can end up with
substantial tax bills. Additionally, they can face penalties for failing to
pay employment taxes and for failing to file required tax forms.
-
Workers can avoid higher tax bills and lost benefits if they know their
proper status.
-
Both employers and workers can ask the Internal Revenue Service 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 – with the Internal Revenue
Service.
-
You can learn more about the critical determination of a worker’s status as
an Independent Contractor or Employee at Internal Revenue Service.gov by selecting the Small
Business link. Additional resources include Internal Revenue Service Publication 15-A,
Employer's Supplemental Tax Guide, Publication 1779, Independent Contractor
or Employee, and Publication 1976, Do You Qualify for Relief under Section
530? These publications and Form SS-8 are available on the Internal Revenue
Service Web site or
by calling the Internal Revenue Service at 800-829-3676 (800-TAX-FORM).
Resources:
Publication
1779 Independent
Contractor or Employee?
Publication
1976
Qualify for Relief Under Sect 530?
Publication
15-A
Employer’s Supplemental Tax Guide
Internal Revenue Service 20 Rule Test
Internal Revenue Service on You
Tube
Officers
Are Employees Of Corporations
When an individual owns 5% or more interest and/or
stock in a corporation, and/or is an Officer of the corporation, that individual
cannot be an independent contractor to the corporation. The individual is deemed
an employee of the corporation and the corporation must pay the individual a
reasonable remuneration. Consequently the corporation will be responsible for
filing and paying the required employment taxes.
References:
Internal Revenue Code Sections: 3121(d)(1), 3306(i) and 3401(c)
Contact Us
After a period of time some of the links herein may expire as old content is
removed from the web.
Copyright © 2001-2022 Gary W. Lundgren, EA
All rights reserved.