Knowing the difference between an employee and an independent contractor is essential. The IRS provides seven things business owners should know:
- The IRS uses three factors to determine the relationship between businesses and workers:
- Behavioral control – Does business have right to direct how the work is done through training, instructions, etc.?
- Financial control – Does the business have the right to control the financial and business aspects of the worker’s job?
- Type of relationship – How do the workers and business owner perceive their relationship?
- If you have the right to control not only what is to be done, but also how it is done, your workers are likely employees.
- If you can direct only the result of the work done (not means of accomplishing the result), your workers are probably independent contractors.
- Employers who misclassify workers as independent contractors can end up with substantial tax bills and face penalties.
- Workers can avoid higher tax bills and lost benefits if they know their proper status.
- Both employers and workers can ask the IRS to determine whether the individual is an employee or independent contractor, by filing a Form SS-8.
- To learn more, visit the IRS website: www.irs.gov/businesses/small/article/0,,id=99921,00.html.
Source: The Ward Agency
