Eight Tax Tips - Employee Vs Independent Contractor

Small business owners often think they have a choice about whether the worker is an employee or an independent contractor. In fact, the business owner does not have a choice. The IRS sets many rules about if and when a worker is an independent contractor or an employee.The reason it is important to determine if a worker is an employee is the government has many rules about employees. Rules such as minimum wage, workers' compensation insurance, overtime pay, employment taxes, unemployment tax, filing tax forms for all employees, and many others.Of course, it is less work and cost less money for a business to hire independent contractors. Every year the IRS comes out with more rules making it harder to classify a worker as an independent contractor.The IRS has divided the rules into 3 broad categories. Who has control over the behavior, financial and the relationship of firm with the worker. Sales persons are in a different category and are subject to different rules.We will talk about 8 of the rules which will affect your classifying the workers which will affect your tax position regarding the workers. Generally, it is not just one isolated item or incident that will change a classification from independent contractor to employee.1. The contractor does not report to the business for assignments or make a report of every action to the business. The business only controls the result of the work and not the details of the work.2. The business does not control the number of hours, schedule or who works for the contractor.3. Included in the category of control the business may not require the worker to attend meetings, or have any penalties for not attending meetings or how assignments are made to the contractor's workers.4. Generally, the contractor supplies his own supplies, equipment and materials. If the business supplies all of these items then the worker is more of an employee than an contractor.5. Another part in the financial category is how the business pays the contractor. Does the business pay by the hour, commission, salary, piece work or lump sum. If the business is paying the worker by the hour or a salary the worker is more in the employee category and not an independent contractor.6. If the contractor does not have any risk of financial loss and/or is covered by worker's compensation insurance by the firm then the worker is probably an employee and not an independent contractor.7. Another broad category is the relationship of the worker and the firm. If the worker gets benefits from the firm such as paid vacation, sick pay, pension or job promotions then the worker is an employee and not an independent contractor.8. The IRS encourages workers to file a form to determine if the worker was really an independent contractor or employee. Any person can file the SS-8 form, even the person who is hiring the worker. Workers who think that they were really an employee and not an independent contractor can file another Form 8919, Uncollected Social Security and Medicare Tax on their compensationThere are serious penalties for a business that does not classify their workers correctly. Some of the penalties are retroactive reclassification of all employees. This reclassification can be retroactive for a number of years and is very expensive.This would mean that the business would need to not only to reclassify the workers but pay retroactive employment taxes, workers' compensation, overtime pay and much more.Not only would the business have to pay back taxes but would also have to pay a hefty fine. For more information on the tax changes that affect your bottom line check out http://NewTaxChanges4Investors.com