Independent Contractor or Employee?

by

As a business owner you may hire individuals to help you with the running of the operations of your business.  Are the individuals working for you classified correctly? The IRS has rules on how a worker needs to be classified.  Misclassifying a worker can cause you, the employer, penalties.

The IRS has seven tips that an employer should know when classifying a worker.

  • There are three characteristics the IRS uses to determine whether a worker is an employee or independent.  They are:

Behavioral Control – do you, the business,  have the right to direct or control the     worker’s activity through training or instructions?

Financial Control – do you, the business, have the right to control the financial aspect of the worker’s financial status?

Type of Relationship – what do you, the business owner, and the worker perceive the relationship to be?

  • Your workers are most likely employees if you are controlling their activities, directing their activities and giving them deadlines on when the work needs to be completed.
  • If you are only controlling the result of the work, but not the means and methods or reaching the results, then they may be an independent contractor.
  • If you misclassify your workers you may be faced with high tax bills, along with failure to file penalties, late fees, etc.
  • If you are a worker, you could pay less taxes if you are being misclassified incorrectly as an independent contractor.  As an independent contractor you are subject to self-employment tax.  As an employee, the employer pays part of the social security and medicare tax.
  • If you are unsure of how to classify a worker you can request help from the IRS by filling Form SS-8.
  • You may qualify for relief under Section 530. which states that you are treating your workers as independent contractors because it is an industry standard for that worker, or you have relied upon advise from an attorney or accountant.  To qualify for this relief you will have to have mailed the required 1099 Misc. forms and treated all workers in the classification the same way.

More information can be found in the IRS Website by clicking on the Business link.

The IRS May Hold You Liable For 941 Payments

by

Are you the bookkeeper or accountant for your company? Are you a signer on any of the company bank accounts? What about your client’s accounts? Do you sign on any of them? If so, you may be held responsible by the IRS for underpaid 941 liabilities. Sounds scary, but it can be true.

How is it possible that can be true? The IRS says the federal income tax and the employee’s portion of social security and medicare taxes withheld is a trust fund. It is to be deposited according to the schedule they have determined for your company. The IRS cannot collect this tax from the employee, even if the employer does not pay the tax to the government.

To protect the government when the tax has not been paid, Internal Revenue Service Code 6672 subjects “all responsible persons” for withholding and payment of taxes to a penalty equal to the amount of taxes due. The penalty is imposed on anyone who is required to collect, administer and pay over the tax and who willfully fails to so.

Two requirements must be met.  First you must be a “responsible person”.  The IRS considers a responsible person anyone who has authority to make business decisions for the company, not just owners of companies.  If you pay the company bills and sign the checks, then you are making business decisions.  You process payroll and sign checks, make the 941 tax deposits and file the 941 quarterly returns, you are making business decisions.

The second requirement for the penalty to be imposed would be if you willfully failed to pay the tax due.  You withheld the money from the pay checks that you signed, but rather than paying the tax liability, you decided to pay a supplier, or a utility, or another vendor.     Once you have done that, you have met both requirements and are subject to the penalty imposed by I.R.S. Code 6672.

Once the IRS determines that a tax is due, forms 4180 and 4183 are completed by an agent, which identifies the responsible person in the company.  In 1993 the IRS determined that secretaries, bookkeepers (nonaccountants), and charitable volunteers are not subject to I.R.S. Code 6672.  Accountants, however, are still held accountable.

What can you do as an employee?  Advise your employer of the penalties he will face for not paying the taxes due.  If possible, don’t be a signer on any accounts.  You don’t want to be personally responsible for the company you are working for.

What can you do as an owner?  Pay your taxes on time.  Pay them before you pay your other vendors.  It’s not your money once you have paid your employees.