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.