It is your responsibility as an employer to classify your workers, whether they’re an employee or independent contractor. These classifications determine how much you need to withhold as an employer. If you classify an individual as an employee, but you do not withhold and pay your proper employee taxes, the IRS will keep you on the hook for unpaid taxes.
Did you know that the IRS assessed 5.9 million civil penalties totalling over $6 billion in employer payroll tax issues? If you’re an employer, it is crucial that you classify your workers properly, as well as get help from a tax consultant if your tax debt exceeds $100,000.
In this article, Jeffrey Anton Collins, a national tax consultant, will help to decide how to classify your employees. Remember, this advice is well founded, but the decision is ultimately yours on how you classify those who work for you.
The most common general rule in classifying workers is based on control. If a worker has only the control to complete the job or task they are given with the tools that are provided, they are more than likely going to be an employee. Independent contractors, on the other hand, have more control over how they do the job and which tools they use to complete the job. This one distinction can help you avoid thousands in tax penalties. Here are some other control factors:
#1. Behavioral Control
The worker is an employee when that worker is directed and informed of how to do the work and which tools to use for the work. Here are behavioral factors that point to a worker being classified as an employee:
- Type of instruction: When to show up, how to work, and which tools to use all indicate that you have an employee, not an independent contractor.
- Degree of instruction: How in-depth you go with your instruction can help determine the classification of your worker. If you go deep with instruction, explaining nuance and processes, you have an employee.
Evaluation. If you are consistently evaluating the quality of your workers craft or performance, they are most likely an employee.
Training. Do you spend hours training your workers? You have employees.
#2. Financial Control
If your business has the right to control or direct the financial business aspects of your worker’s job and position, than you have an employee. Here are some financial factors that point to classifying a worker as an employee.
- Significant Investment. If you invest significantly into the worker’s success, you more than likely have an employee.
- Reimbursed Expenses. Do you require your workers to bring their expense receipts in for reimbursement? You have employees.
- Consistent Pay. An employee has a pay structure. An independent contractor tends to have profit opportunity.
#3. Relationship Perception
How you, the business, and the worker perceive the relationship with one another helps to define the classification of the worker. Here are some relationship factors:
- Written Contracts. A contract that describes the relationship helps determine the classification.
- Benefits. If you provide benefits to workers, then you have employees. Independent contractors do not receive benefits from employers.
- Services Provided. If the worker’s “services” are defined by the employer, then the worker is an employee.
It’s important to classify your workers correctly so that you can avoid being one of the millions of annual employer tax penalties related to payroll.
Do you owe more than $100,000 in tax debt? Contact Jeffrey Anton Collins today!