As a Connecticut business owner, one of the surest ways to find trouble with the IRS is through mistakes in payroll deductions. Laws regarding the deduction and payment of taxes from employee paychecks is complicated and easy to misinterpret. However, some employers may misclassify their employees, which leaves workers without benefits and opens business owners to legal trouble.
If you own a business, you may have employees or independent contractors. Often, there is such a fine line between the two that even the workers may not be certain if they are employed by you or are independent contractors. However, clarifying the classification of each employee is essential to avoiding the serious penalties you may face if you fail to pay the appropriate payroll taxes.
What is the difference?
Contractors are responsible for paying their own income taxes. You neither withhold taxes nor pay the IRS for these workers. For your employees, however, you must deduct the required income tax, place it in an account until taxes are due and pay the IRS the full amount promptly. You can see that it is considerably easier to hire contract workers rather than employees because, not only will you save money in employee benefits, you will not have the burden of record keeping and tax preparation.
Nevertheless, you cannot simply decide an employee is an independent contractor to avoid the tax burden. If you are uncertain which of your contract workers may be an employee, you can ask yourself specific questions, for example:
- Do you have control over the worker's behavior, including daily schedule, place of employment and use of supplies?
- Do you offer intense instruction and frequent training instead of allowing the worker to manage the tasks his or her own way?
- Do you provide the equipment and supplies the worker uses or reimburse him or her for most expenses?
- Does your worker receive a regular, predictable wage, weekly or hourly, rather than a flat fee per job?
- Do you anticipate the worker will remain with your company indefinitely?
- Do you offer employee benefits, such as a pension, health insurance or vacation days?
Answering yes to these questions means it is likely that your worker is your employee, not an independent contractor. Of course, your worker may have signed a contract which states that he or she is an independent contractor, but this alone is not enough to support your claims that you do not owe payroll taxes for that worker.
The IRS loses billions of dollars annually to employers who use this tactic, and they respond swiftly to reports of such misclassification. It is wise to learn the factors that qualify a worker as an employee and to accurately classify your workers to avoid consequences and penalties from the IRS.