With employees, the employer must pay Social Security, Medicare, state unemployment and federal unemployment taxes. Employers are also required to carry workers’ compensation insurance and sometimes liability insurance. They must file new hire reports and quarterly payroll forms. Employees also expect benefits such as health insurance, holiday pay, sick pay, and vacation pay.
Contractors incur none of these costs because they pay both halves of Social Security and Medicare taxes, buy their own liability policy and generally are not paid for the time they don’t work.
Since the benefits of using independent contractors are so significant, the IRS looks closely at this to prevent exploitation of workers who should really be considered employees.
A number of tests exist to determine whether workers qualify as general contractors:
1. They provide their own tools and supplies.
2. They work independently. They are told what result is desired, not the individual steps necessary to do the job.
3. They do the same work for other firms.
2. They work independently. They are told what result is desired, not the individual steps necessary to do the job.
3. They do the same work for other firms.
If you have the right to control both what is to be done and how it is done, your workers are employees. If you can direct only the results, you are working with contractors. It is also important to know how workers perceive the relationship.
Although there are certainly benefits to both groups, it is important to adhere to IRS law about how they are classified.
Employers who misclassify workers as independent contractors can end up with substantial tax bills as well as penalties for failing to pay employment taxes and failing to file required tax forms.
Knowing the proper worker classification can be critical to your business, so don’t guess. Visit the IRS.gov website to be sure.
