Are you classifying the people performing services for your business as independent contractors for IRS tax purposes? Is it possible that they might really be employees for IRS tax purposes?

This is a decision that you must get right or you could face disastrous consequences.

How these workers are classified can have major tax and expense consequences because employees and independent contractors are treated differently by the IRS, the EDD and your Workers Compensation Carrier. Improper classification for tax purposes can cause problems that could financially harm your business. Business owners must withhold income tax on employees’ wages, and must pay all the necessary Employer taxes that are due. They must provide the employee with a Form W-2, “Wage and Tax Statement,” showing the amount of wages and tax withheld for the year. You could also wind up on the hook for injury claims if they get injured on the job and it turns out that they are an employee.

Additionally, payments to an independent contractor that total $600 or more for the tax year must be reported by the business owner on Form 1099-MISC, “Miscellaneous Income,” and filed with the IRS. A copy also must be given to the independent contractor.

Independent Contractors that either cross the line or could make the case that they are employees can challenge you in court and win if you aren’t careful.

The key factor which determines whether a worker is an independent contractor is who has the right to control the worker as to how and when work is accomplished. The IRS has developed twenty common law factors which are used on a case by case basis to determine whether a worker is an independent contractor or an employee for IRS tax purposes. Independent contractors do not have to satisfy all of the twenty common law factors. It is best to think of the factors as weights on a balance scale. (Contact Champion for a copy of the 20 factors)

If a worker clearly is an independent contractor, an Independent Contractor Agreement is useful and recommended; however, any agreement, no matter how well drafted will not change the situation if it is determined by the courts or the IRS that an Independent Contractor is truly an employee.

The laws surrounding the employee versus independent contractor issues are extremely complex and you should consult with an HR professional before acting, or to review a current situation.

For many business owners, it’s tempting to reduce their tax bill and push the envelope a bit on classifying employees but it may not be worth the risk. Contact Champion today and we can assist you with making the right decision before it ends up costing you more than anticipated.