July 24, 2018
As a small business owner, you have several things to keep track of. As you’re growing, you may even bring on help. Once this happens, a necessary and important step is to ensure you’re correctly classifying your workers.
This crucial step allows you to determine if you are required to withhold income, Social Security and Medicare taxes or if, as an independent contractor, you don’t have to. Also, remember that employees are eligible for benefits, whereas independent contractors are not. This can be a costly mistake if not correctly identified.
Yes, we get it. This isn’t why you got into business. But it’s an important step to take that can save you from a world of hurt. If you’re not classifying correctly, you can get stuck with some harsh fines and penalties. When businesses wrongly classify their workers, they are still liable for the related taxes and payments for those workers, and may even face other sanctions. Correctly classifying your workers helps you avoid this, making it easier for you to run your business.
So where do you begin? Here are the steps you need to take to make sure you’re properly classifying workers:
Determine if you have employees or independent contractors.
The business relationship between the organization (you) and the person performing the services must first be analyzed to determine how payments should be treated.
The employee-employer relationship is generally determined by the “common law” test. The common law test focuses specifically on determining who has the right to control two basic elements:
A worker is considered an employee (and subject to payroll tax withholding) if the employer has the right to control both aspects of the test. In other words, the employer controls both the results and how it must be performed.
A worker is considered an independent contractor if they can only control the results of the work, not how the work will be done.
Consider these types of controls.
The IRS uses three categories when determining employee status and the degree of control and independence.
A worker is considered an employee when the business gets to be bossy. Okay, maybe bossy isn’t the right word, but the business does have the right to direct and control the work being done. Behavioral control can be broken down into a few more distinct categories:
Control over Finances
This category looks at what control the business has over the financial and business pieces of the worker’s job. Factors to consider include:
What the business or worker offers in the relationship can also determine classification. Some key elements to consider are:
When in doubt, use your resources.
In case you hadn’t guessed, this isn’t simple. No one set of factors is the supreme answer. All the facts and circumstances in a situation have to be taken into account in determining whether an individual is an employee or an independent contractor.
If you need a little extra help, Form SS-8 can be filled out to assist in the decision.
Your accountant should also be able to help you through these details, to ensure you’re classifying correctly and protecting yourself from having to pay for unmet tax burdens or sanctions.