If you are a business owner, you must know the difference between independent contractors and employees. Improperly classifying workers can lead to significant tax implications. Once the appropriate employment type is determined, you must obtain a W-9 from all contractors or a W-2 from all Employees before work performing any work. Independent Contractors are required to pay self-employment taxes. Employers are required to withhold, file, and pay employment taxes to state and federal agencies for employees. Three rules can help you prove the degree of independence for your employee.
Behavioral Rule –
If you hire an employee, you are subject to providing your employee with training, supervision, and instructions. The employee will report to work at the time you determine. If you hire an independent contractor, they must have the autonomy to complete their job according to their expertise. An independent contractor typically sets their schedule and is only responsible for meeting deadlines. Generally, an independent contractor will not work full-time for a single company; instead, they will solicit business from other sources.
Financial Rule –
An independent contractor will provide the necessary equipment, tools, and supplies. They are typically licensed and insured and pay any required fees. An employer will reimburse employees for business supplies and pay them a fixed compensation. Employees are not at independent risk of financial loss; if they make a mistake, the employer may incur a potential loss.
Type of Relationship Rule –
An independent contractor will have a contract that states the work they will do, their ownership, and their responsibility in completing the job. If the independent contractor meets the terms of the agreement, then they cannot be terminated. Independent Contractors generally do not receive employee-type benefits such as retirement, vacation, hourly pay, or insurance. Most employees work at the employer’s will; the employer can determine if they are no longer needed or if they are incompatible with the employer’s needs.
A significant number of penalties assessed by the IRS are employment penalties. The burden of proof to classify a worker as an independent contractor falls on the employer. Let Kostenborder Tax & Accounting help you navigate your employment tax obligations.
0 Comments