It's important for business owners and workers to know whether an individual should be classified as an employee or an independent contractor, since the rules for tax withholding are different. While an employer is required to withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee, they are not typically responsible for witholding income or paying taxes for independent contractors.
The tax team at Cotton Mather CPA in the North Hills area of Pittsburgh can help businesses determine the proper classification for workers and other complicated tax issues. Contact us today at (412) 931-1617.
The two main points an employer will consider when classifying a worker are Control & Relationship. According to the IRS, those terms are defined as the following:
- 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
- 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 un-reimbursed business expenses
If you need assistance with small business tax prep or help with determining the status of workers that are affiliated with your company, call us today.