Suppose you hire several "outsiders" to do some inside work. Are they employees or independent contractors. It can make a big tax difference. The IRS is cautioning small business owners about misclassifications. It recently issues a reminder about the basic guidelines for determining the employment status of workers.
This is not small potatoes. If the IRS discovers an error, it will assess back federal employment taxes for the years in question, plus interest and penalties. If a worker is treated as an employee, the business must withhold federal income tax and the employee's share of Social Security and Medicare taxes from his or her wages. In addition, the business has to pay it share of Social Security and Medicare taxes plus federeal unemployment tax . Finally, your small business is required to isssue a Form w-2 to the employee, providing the relevant information.
On the other hand, if a worker qualifies as an independent contractor, your business is not responsible for federal income tax withholding and does not owe Social Security. Medicare, or FUTA taxes on the worker's wage/ What's more, your business does not have to provide costly fringe benefits, such as health insurance, 401k plans and group term life insurance to those workers. For these reasons , this setup is generally preferable to small business owners.
The IRS emphasizes two key factors
1) Control: The relationship between a worker and a business is important. If the business controls what work is accomplished and directs how it is done, it exerts behavioral control. If the business directs or controls financial and certain relevant aspects of a workers job, excercises financial control . This includes the follow:
2) Relationship: how the employer and worker perceive their relationship is also significant in determining the worker status. Some of the key issues to think about include the following:
Finally, the IRS reminds employers that it can help determine the status of their workers by fusing Form ss-8.
Daniel Cullinane CPA
25 Plaza 5 25th fl Jersey City NJ phone 732-516-1648 fax 732-516-9778
2500 Plaza 5 25th fl Jersey City NJ 07311 phone 732-516-1648 fax 732-516-9778
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