Is your worker an employee, or an independent contractor?

Employee vs. Independent ContractorIf you run a small business, you’re probably intimately familiar with the verb “pay.” Parting with money isn’t always easy, but when you have to, it pays to do it right. Especially where paying people for their work is concerned.

Some employers have employees; others work solely with independent contractors; still others have a mix. There are also the classifications “statutory employee” and “statutory nonemployee.” It’s important that you accurately determine (for tax purposes) which kind(s) of people you’re paying.

When you have employees, you’ll be withholding income taxes from their pay, and you’ll also pay various taxes such as Medicare and Social Security. If your worker is an independent contractor, you’ll do no withholding or paying of taxes.

Classifying your workers

It sounds like knowing which classification people working for you fall into is easy, but it’s not always. The IRS provides a guideline to help in this process:

  1. Do you as an owner exercise control over what the worker does and how he or she goes about performing various duties?
  2. Do you control the financial and business aspects of the worker’s job? These include the way you pay the worker, reimbursement for expenses and providing tools and equipment necessary for completing tasks.
  3. What’s your relationship with the worker? Has he or she signed contracts? Are benefits such as vacation pay, sick time, a pension, health coverage and others extended to the employee?

If you’re still not clear what kind of employee your worker is, you can file with the IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Either you or your worker can complete and submit this form, after which the IRS will make a determination about the status of the worker. This process can take six months or more.

After you’re clear on what type of worker you have, it’s up to you to file all related forms and pay the appropriate taxes. Here are the forms you’ll need for independent contractors and for employees.

Misclassifying employees

When an employer incorrectly classifies an employee as an independent contractor, the employer may be required to pay employment taxes for the worker. Relief provisions, which can relieve an employer of these responsibilities, won’t apply in this case.

If workers feel they’ve been misclassified as independent contractors, they can complete Form 8919, which lets them report what would rightly be their portion of Medicare, Social Security and other taxes.

Sorting through IRS filing and worker-status guidelines can be a chore. If you find more help is required in understanding this and other tax concerns, consider working with a professional.

W. Cotton Mather of Pittsburgh is a tax and accounting firm specializing in small- and medium-sized business. Learn more about our services on our website, or call (412) 931-1617 for more information.

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