How to Classify Workers
The Main Difference Between a Contractor & Employee
Employees (common law employee) are supervised by a superior, have predetermined hours and are required to go to an office and perform tasks necessary for the daily operation of the business.
Independent contractors set their own hours, are required to perform their work at a certain standard but are not supervised throughout the process. They have the freedom to work from anywhere and the work they do isn’t essential to the daily tasks of the business.
Your Duty as an Employer
As an employer, you’re required to pretty much take care of your employees’ taxes for them. That means withholding, depositing, reporting, pay Social Security taxes, provide health insurance and pay taxes for health insurance.
Why It Matters to Classify Workers Properly
It comes down to paying taxes. You’re required to pay more taxes for employees than you do for independent contractors. If you’re misclassifying employees as contractors, that means you’re basically stealing from the IRS. You can guess how they feel about that?
Even if you do it by mistake, the IRS will still penalize and probably flag your business, which means you’ll be getting audited more often and your documents will be analyzed more thoroughly than for other businesses.
The Consequences of Misclassifying
When you get found for misclassifying you’ll be required to pay back the taxes you owed (as if you had classified the person as an employee) plus penalties for each of the taxes that you skipped out on paying.
That means paying back plus paying penalties for income taxes, Medicare taxes, Social Security taxes, and unemployment taxes. Depending on what actual job title the person (employee) deserved, you, as an employer shall give him/her the benefits they deserve.
Read Internal Revenue Code section 3509 for more information.
The Three Big Determining Factors of an Employee
There are three main rules the IRS uses to determine how someone should be paid for the service(s) they provide, they call these, Common Law Rules.
What to Do If You're Still Unclear
It can take at least six months to determine whether you should hire employees or independent contractors but it’s definitely worth the time.
If at any point you should get audited, maybe you can say you were waiting for a determination from Form SS-8, as long as it’s true and you’re not trying to skip on paying taxes.