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Employee vs. Independent Contractor Tips From the IRS

The IRS offered tips for business owners on hiring employees vs independent contractors. There are certain rules that help business owners classify the types of employees that they hire. These rules affect how business owners pay their taxes and how they handle the paperwork for their employees. Sometimes business owners incorrectly classify workers which can result in large tax bills. It is important for business owners to know the defining characteristics of employees versus independent contractors so that their taxes accurately reflect this difference.

In a recent IRS newsletter, the IRS offered some tips for business owners on how to classify their workers. If there is still any doubt, business owners can contact the IRS directly for information on their specific situation. The IRS uses three characteristics to define the difference between the two types of workers which are further explained below:

Employee vs. Independent Contractor – Seven Tips for Business Owners

As a small business owner you may hire people as independent contractors or as employees. There are rules that will help you determine how to classify the people you hire. This will affect how much you pay in taxes, whether you need to withhold from your workers paychecks and what tax documents you need to file.

Here are seven things every business owner should know about hiring people as independent contractors versus hiring them as employees.

1. The IRS uses three characteristics to determine the relationship between businesses and workers:

* 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.
* Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

2. 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.

3. 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.

4. 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.

5. Workers can avoid higher tax bills and lost benefits if they know their proper status.

6. 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, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

7. You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS 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 IRS website or by calling the IRS at 800-829-3676 (800-TAX-FORM).

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Erich J. Ruth

Erich J. Ruth provides technical support for National Software which is the parent company for 1099FIRE. 1099FIRE develops and markets a comprehensive range of products that enables any size of business or institution to effectively manage and comply with year-end filing requirements. 1099FIRE is an employee-owned company located in Phoenix, Arizona.

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