Business owners small and big alike must often rely upon the assistance and services of others to complete work-related tasks and assignments. Business owners must not only attempt to find an individual who possesses the necessary skills and experience, but they must also take care to ensure that the individual hired is properly designated.
An employer’s tax responsibilities are very different depending on whether an individual who is hired is classified as an independent contractor or an employee. For example, in the case of an employee, an employer must pay taxes related to Social Security, Medicare, federal income taxes and unemployment. In contrast, individuals who are designated as independent contractors are largely responsible for paying their own taxes.
Some employers experience difficulty when attempting to distinguish between employees and independent contractors. In general an individual should be classified as an employee in cases where an employer can “control what will be done and how it will be done.” Conversely, when it comes to individuals who are designated as independent contractors, an employer can “control or direct only the result of the work.”
In cases where a business owner fails to appropriately designate an employee, he or she may be subject to additional taxes and penalties. In some cases, an employer may even be subject to criminal charges related to employment and tax fraud. For employers who believe they are guilty of misclassifying an employee as an independent contractor, the Internal Revenue Service offers an opportunity to rectify the situation via its Voluntary Classification Settlement Program.
Business owners, who have questions or concerns about employment designations and employment taxes, may choose to consult with an attorney.
Source: IRS.gov, “Independent Contractor (Self-Employed) or Employee?,” April 21, 2015