Tag Archives: Independent Contractor

IRS Small Business Tip – Employee or Independent Contractor??

Issue Number: IRS Small Business Week Tax Tip 2017-02
Inside This Issue
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Employee or Independent Contractor? Know the Rules

The IRS encourages all businesses and business owners to know the rules when it comes to classifying a worker as an employee or an independent contractor.
An employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee. Employers normally do not have to withhold or pay any taxes on payments to independent contractors.
Here are two key points for small business owners to keep in mind when it comes to classifying workers:
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 worker’s job, it exercises financial control. This includes:
• The extent of the worker’s investment in the facilities or tools used in performing services
• The extent to which the worker makes his or her services available to the relevant market
• How the business pays the worker, and
• The extent to which the worker can realize a profit or incur a loss
2.  Relationship.  How the employer and worker perceive their relationship is also important for determining worker status. Key topics to think about include:
• Written contracts describing the relationship the parties intended to create
• Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation or sick pay
• The permanency of the relationship, and
• The extent to which services performed by the worker are a key aspect of the regular business of the company
• The extent to which the worker has unreimbursed business expenses
The IRS can help employers determine the status of their workers by using form Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. IRS Publication 15-A, Employer’s Supplemental Tax Guide, is also an excellent resource.
Share this tip on social media — Employee or Independent Contractor? Know the Rules. https://go.usa.gov/x58ra#IRS


Misclassifying Workers as Independent Contractors Can Be A Costly Mistake

Using independent contractors in your business can save money.  Independent contractors do not receive typical company benefits such as vacation, sick pay or health insurance/retirement benefits.  Plus, employers don’t pay social security taxes (FICA), or provide unemployment benefits. However, it is easy to blur the line between a true independent contractor and employee and the IRS is cracking down.

In order to be considered an independent contractor, a worker should meet certain criteria.  Control is one of the primary determinators.  What is your level of control over the worker?  An independent contractor determines how and when work will be performed whereas an employee’s work parameters are established by the employer.  For example, if you require a worker to attend regular meetings, work set hours and use specific materials and equipment, then in most cases that worker is an employee because you are exercising significant control over his/her job performance.

Other factors include such things as:

  • Working relationship. Does the worker have other clients with whom he works or does he work exclusively for you?  An independent contractor is in business for himself so he should have other clients or at least be in the market to acquire other business opportunities.
  • Work hours. An independent contractor should, in most cases be able to set his own work schedule. As long as the contractor meets the deadline established by the client, he can decide his own work schedule.
  • Work location. Generally, an independent contractor provides for his own work location, materials and equipment.  In other words, his primary office is not located at your company’s facility.
  • Expenses. Employees typically submit their work-related expenses to their employer for reimbursement. An independent contractor, however, generally absorbs expenses as part of the cost of doing business.
  • Taxes. An independent contractor pays his own taxes by filing quarterly estimated tax returns.  Your company does not withhold taxes.

If the IRS determines you have misclassified a worker as an independent contractor rather than an employee, get out your checkbook.  You may be charged for back taxes, interest and penalties.  In fact, there is even the possibility of criminal charges.  And in some cases the misclassified worker has been able to sue the employer for lost benefits during the time in which he should have been considered an employee.

The IRS has a set of guidelines an employer can use to determine the proper status of a worker.  If you are still uncertain, give us a call us.

While in the short-term, using independent contractors in your business may save you money, it could cost you significantly more in the long-term.  Make sure you make the right choice.

 

If you have additional questions about this post or any other, please contact us directly at 928-778-0079.

Schutte & Hilgendorf is a leading Prescott CPA firm, offering superior client service to individuals, small businesses, non-profit organizations, and homeowners associations.

Our services include accounting, bookkeeping, audit, review, tax return preparation, tax planning, payroll and QuickBooks consulting.  We are located in Prescott and serve all of Yavapai County, and Northern Arizona.


IRS/DOL Crackdown on Independent Contractor vs. Employee

IRS/DOL Crackdown

If you classify any workers as “independent contractors”—or have plans to do so—2013 is the year to make sure you get that classification correct.

Below is Topic 762 – Independent Contractor vs. Employee provided by irs.gov to help in identifying which classification a worker falls:

To determine whether a worker is an independent contractor or an employee under common law, you must examine the relationship between the worker and the business. All evidence of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories – Behavioral Control, Financial Control, and the Type of Relationship.

Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done, through instructions, training, or other means.

Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job. This includes:

  • The extent to which the worker has unreimbursed business expenses
  • The extent of the worker’s investment in the facilities used in performing services
  • The extent to which the worker makes his or her services available to the relevant market
  • How the business pays the worker, and
  • The extent to which the worker can realize a profit or incur a loss

Type of Relationship covers facts that show how the parties perceive their relationship. This includes:

  • Written contracts describing the relationship the parties intended to create
  • The extent to which the worker is available to perform services for other, similar businesses
  • Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay
  • The permanency of the relationship, and
  • The extent to which services performed by the worker are a key aspect of the regular business of the company

For more information, refer to Publication 15-A (PDF), Employer’s Supplemental Tax Guide, or Publication 1779 (PDF), Independent Contractor or Employee. If you want the IRS to determine whether a specific individual is an independent contractor or an employee, file Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Contact Schutte & Hilgendorf with your questions related to independent contractor vs. employee.  Schutte & Hilgendorf, CPAs, is a full service public accounting firm providing tax planning, preparation, audit, accounting, and QuickBooks consulting to individuals and small business in the Prescott and greater Yavapai County area.  Call us at 928-778-0079 or visit www.prescottaccountants.com


Misclassifying Workers as Independent Contractors

Misclassifying Workers as Independent Contractors Can Be A Costly Mistake

Using independent contractors in your business can save money.  Independent contractors do not receive typical company benefits such as vacation, sick pay or health insurance/retirement benefits.  Plus, employers don’t pay social security taxes (FICA), or provide unemployment benefits. However, it is easy to blur the line between a true independent contractor and employee and the IRS is cracking down.

In order to be considered an independent contractor, a worker should meet certain criteria.  Control is one of the primary determinators.  What is your level of control over the worker?  An independent contractor determines how and when work will be performed whereas an employee’s work parameters are established by the employer.  For example, if you require a worker to attend regular meetings, work set hours and use specific materials and equipment, then in most cases that worker is an employee because you are exercising significant control over his/her job performance.

Other factors include such things as:

  • Working relationship. Does the worker have other clients with whom he works or does he work exclusively for you?  An independent contractor is in business for himself so he should have other clients or at least be in the market to acquire other business opportunities.
  • Work hours. An independent contractor should, in most cases be able to set his own work schedule.  As long as the contractor meets the deadline established by the client, he can decide his own work schedule.
  • Work location.  Generally, an independent contractor provides for his own work location, materials and equipment.  In other words, his primary office is not located at your company’s facility.
  • Expenses. Employees typically submit their work-related expenses to their employer for reimbursement.  An independent contractor, however, generally absorbs expenses as part of the cost of doing business.
  • Taxes. An independent contractor pays his own taxes by filing quarterly estimated tax returns.  Your company does not withhold taxes.

If the IRS determines you have misclassified a worker as an independent contractor rather than an employee, get out your checkbook.  You may be charged for back taxes, interest and penalties.  In fact, there is even the possibility of criminal charges.  And in some cases the misclassified worker has been able to sue the employer for lost benefits during the time in which he should have been considered an employee.

The IRS has a set of guidelines an employer can use to determine the proper status of a worker.  If you are still uncertain, give us a call us.

While in the short-term, using independent contractors in your business may save you money, it could cost you significantly more in the long-term.  Make sure you make the right choice.

(From business.gov article Misclassifying Workers as Independent Contractors Can Be Costly)

Should you have questions regarding this post or any other tax needs, contact us at Schutte & Hilgendorf, PLLC, Prescott accountants serving the greater Yavapai County with tax, accounting, auditing, and QuickBooks consulting expertise.