Independent Contractor or Employee: The Distinction Matters to the IRS

If you’re a business owner, you have financial incentive to want to classify workers as independent contractors rather than as employees. For example, you’re required to withhold and pay taxes on employee wages, and you may need to offer employee benefits such as paid time off and pension contributions. None of these are required with independent contractors.

There may be legitimate reasons and situations to use independent contractors. The facts and circumstances decide the proper treatment – and getting the classification right will help you avoid the prospect of back payroll taxes, penalties, and interest.

So how do you go about getting the classification right? Start by reviewing the degree of control your business has over the worker and the job function. Does your company have the right to control how and when the worker does a job? How do you pay the worker – by the hour or by the job? Who provides the tools and supplies for the job? Is there a written contract between your business and the worker spelling out the division of rights and responsibilities? Is the job for your company ongoing, or does the worker perform services for other customers?

Your answers to these questions can guide you to the proper classification. If you need assistance, give us a call. We’ll help you review the facts and explain your options.