Are you sure you have an independent contractor by IRS standards?
An independent contractor is a small business owner’s favorite friend. They are source of temporary employment that can carry you through a busy season. By using an independent contractor, you can avoid the hassle of paperwork that comes with hiring. Also, a contractor can save you thousands of dollars in federal employment taxes without the necessary payout of employee benefits. It’s no brainer, right? Therefore, an independent contractor seems like the perfect solution to business growth.
Independent Contractor vs. Employee
Are you dictating how your independent contractor should do their work? If so, you have probably misclassified your worker. The IRS uses a holistic approach to determine if a worker is a true independent contractor or a misclassified employee. For that reason, let’s look at what the IRS uses to determine if your worker is an employee or not.
According to the IRS, there are facts that provide evidence of the degree of control and independence of a worker. These fall into 3 categories:
- Behavioral: Does the company control or have the right to control what the worker does? Does the company control how the worker does his or her job?
- Financial: Does the payer control business aspects of the worker’s job? (these include things like worker’s payments, reimbursements for expenses, who provides tools/supplies, etc.)
- Type of Relationship: Are there contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work they are doing a key aspect of the business?
The IRS looks at the entire relationship between business and worker when determining if a worker is an independent contractor. The IRS will also look at the extent to which the business directs and controls and documents the worker’s performance. It’s not only one or two factors that determine the IRS’s decision. They will look at all factors of the worker’s relationship with the business.
Support For Your Tax Preparation
Rather than making a mistake in the classification of your workers, let Paragon guide you. Running a business is not easy if you do it alone. We specialize in small business accounting and tax preparation for a variety of industries. Before year end, we support business owners with the year end tax preparation and W2s and 1099s service. Contact us today & we will get it done for you.