Are Your Workers Employees or Independent Contractors?
· Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms. Auditors are becoming stricter with regulating this area; over the next three years the IRS will be conducting random audits of over six thousand businesses to be sure they are classifying workers properly. The IRS estimates that they will raise over seven billion dollars throughout the next ten years with tighter enforcements.
· The Voluntary Classification Settlement Program VCSP is a new program developed by the IRS that allows you to voluntarily reclassify your workers as employees for future tax periods for employment tax purposes. Under the VCSP, you will pay 10 percent of the amount of employment taxes calculated under the reduced rates of section 3509(a) of the Internal Revenue Code for the compensation paid for the most recent tax year to the workers being reclassified under the VCSP. In addition, the you will not be liable for any interest and penalties on the payment under the VCSP, and will not be audited for employment tax purposes for prior years with respect to the worker classification of the workers.
· There are three basic rules that allow the IRS to determine which category the people that are doing work for you fall into.
1) Behavioral Control – Do you give them a high degree of instructions? Do you have evaluations on their performance? Is there training to show them how you want the work completed?
2) Financial Control – Do you control how they get paid? Do you reimburse expenses to them? Do you provide the tools or supplies to complete the work? Are you responsible for their pay raises?
3) Type of Relationship – Do you have the right to control or direct not only what is to be done, but also how it is to be done?
If you are able to answer ‘yes’ to majority of these questions, you most likely have employees. But, if you are able to control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.
You don’t want find out after an audit that you owe a lot of back taxes for classifying contractors incorrectly. By staying up to date with the government’s contractor classification guidelines and making sure your contractors actually fall within them, you can save yourself a lot of money and stress. This can be a tricky topic and there are fine lines for defining contractors versus employees. So be sure that you are classifying your workers properly.
Here’s a comparison guide from the IRS. Employee or Independent Contractor