One problem often faced by a business is determining whether a worker is an independent contractor or an employee. The IRS offers ten tips on dealing with this problem in IRS Summertime Tax Tip 2009-20. Although these tips refer to small businesses, they can apply to large businesses as well.
The IRS begins by noting that, if you are a small business owner, whether a worker is an independent contractor or an employee will impact how much taxes you pay and the amount of taxes you withhold from his or her paycheck. Additionally, it will affect how much additional cost your business must bear, what documents and information the individual must provide to you, and what tax documents you must give to him or her.
With that said, the IRS offers the following as the top ten things every business owner should know about determining whether a worker is an independent contractor or an employee:
1. Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.
2. 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.
3. 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.
4. The Type of Relationship factor relates to how the worker and the business owner perceive their relationship.
5. 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 worker is most likely an employee.
6. 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 worker is probably an independent contractor.
7. 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.
8. Workers can avoid higher tax bills and lost benefits if they know their proper status.
9. 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.
10. 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 Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).