Improperly classifying workers can lead to significant tax implications. As a business owner, you must know the difference between independent contractors and employees. Once you have determined the appropriate employment type, you must complete the proper forms and pay the associated taxes.

Behavioral – Employees are subject to the employer’s training, supervision, and instructions. An independent contractor has the autonomy to complete the job as their expertise dictates. An employee reports to work as determined by the employer; an independent contractor typically sets their schedule and is only responsible for meeting a deadline. Generally, an independent contractor will not work full-time for one company; they will solicit business from other sources.

Financial—An independent contractor will provide equipment, tools, and necessary 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 will have the potential of loss.

Type of relationship – An independent contractor will have a contract stating the work they will do and their ownership and responsibility in completing the job. If the independent contractor meets the terms of the agreement, then they cannot be terminated. Most employees work at the employer’s will; the employer can determine if they are no longer needed or incompatible. Independent Contractors generally do not receive employee-type benefits such as retirement, vacation, hourly pay, or insurance.

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.