Do you have more work than you can handle? Are you thinking of bringing someone on to help out? Should you hire them as an employee, or make them a contractor? Here are some points to consider:
First, the IRS common law rules: the IRS offers 3 categories to help determine the degree of control and/or independence and thus the proper classification of an individual – Behavioral, Financial and Relational.
– if the details of the work performed are the key to evaluation, then the individual should probably be made an employee,
– if the end result alone is the key to evaluation, then the individual should probably be considered a contractor.
– if the employer controls the schedule and resources, then the individual should probably be made an employee,
– if there is no set schedule and the resources are owned by the individual, then the individual should probably be considered a contractor.
Financially, the greater the potential for the individual to lose money as a result of the work performed (for non-reimbursed expenses such as tools), the greater the likelihood that they should be considered a contractor.
Relationally, if you hire the individual with the expectation that the relationship will continue indefinitely (rather than for a specific project or period), the individual should probably be considered an employee.
Second, the tax liability: employers must bear the tax burden for employees (via FICA and state/federal unemployment taxes), while the individual must bear the tax burden as a contractor (via self-employment tax on their own tax return). Either way, employers are responsible for filing the appropriate paperwork (W2 for employees and 1099s for contractors). Employers must keep an I9 and W4 on file for all employees, and a W4 for all 1099 contractors.
While many employers try to avoid taxes by classifying workers as 1099 contractors, it is important to review your company’s growth plan to accurately implement a staff structure that is effective on both an operations and tax basis. Beware that the IRS looks for improper classification by employers looking to avoid taxes through contractor designation.
Ultimately, work classification is regulated and correctly governed by the IRS. If the IRS determines that an employee was incorrectly classified and paid as a 1099 contractor, the employer will be subject to pay the backup withholding tax for that person.
For more information, be sure to visit the IRS website at www.irs.gov.
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