Small business owners can hire individuals as either employees or independent contractors. Which classification a hired individual falls under is often a confusing process for business owners, but it’s this critical classification that affects what tax documents must be filed; how much you, the business owner, pays in taxes; as well as whether or not you should be withholding from a particular worker’s paycheck or not.
If you own a business and hire people, then you should keep these seven points in mind as you go about hiring workers as either employees or independent contractors:
- If you, as an employer, intentionally or otherwise misclassified your workers, then you could suffer significant tax bills and be facing hefty penalties for not filing the appropriate tax forms and not paying employment taxes.
- You should know and understand how the Internal Revenue Service (IRS) determines the relationship between a worker and a business. The IRS uses the following three factors in determining this relationship:
- Type of relationship, which means how both your business and the worker views the relationship.
- Financial control, which refers to whether or not your business can control or direct the business and monetary aspects of the worker’s job.
- Behavioral control, which refers to whether or not your business can control or direct how work is done through means like training or instruction.
- IRS Form SS-8, which is labeled as the Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, can be filed by employers and/or workers. This form essentially asks the IRS to determine if a specific worker’s status should be classified as an employee or as an independent contractor. IRS form SS-8 can be obtained online at IRS.gov or by calling 1-800-829-3676.
- Generally speaking, a worker should most likely be classified as an employee if the employer can direct or control what is being done and how it’s done.
- Generally speaking, a worker should most likely be classified as an independent contractor if the employer only directs or controls the result of the work, and not the manner, means, or methods being used to accomplish the end result.
- Do ensure that workers are aware of their classification, or worker status. This will not only help them avoid higher tax bills, but also avoid losing any valuable benefits.
- Check out the small business tab on the IRS.gov website and IRS publications 15-A, 1779, and 1976 to find out more about determining a worker’s status as either an employee or as an independent contractor.
