Why It’s Necessary to Properly Classify Your Workers
As your business grows and succeeds (yay!), there may come a time when you decide that you want to hire some team members. This is a big step and congratulations are definitely in order. But don’t forget to thoroughly research your hiring options before you move forward. Like, for instance, will the people who work for you be classified as employees or independent contractors?
While it might be tempting not to worry about this question, in fact, it’s crucial to consider it because misclassifying employees as independent contractors can have costly consequences for your business. Read on to learn more about how the IRS determines the status of workers so you know exactly what to do as you go about hiring people to work for your business.
Wear Blinders at Your Own Peril… Seriously!
To put it bluntly, being an employer can be very expensive. While it varies by state, in New York, for example, businesses are taxed at three different levels: federal, state, and local. (And then there’s social security and medicare requirements and payroll insurances like disability, PFL, and worker’s comp too.) But even if this sounds a bit intimidating, it’s the reality of the situation, and as a reputable, upstanding business owner, it’s your responsibility to meet all requirements and pay all the necessary taxes.
Trying to skirt your responsibilities in this area or purposely remaining in the dark isn’t a great idea. Just ask the small business owner who had to pay back $18,000 in employment taxes because she had previously miscategorized her employees as independent contractors. (Oh no!) Or the owner who had to go through a workers’ compensation audit because he thought his organization’s volunteers and independent contractors were his employees.
While there are clearly very real consequences if you get the employee/independent contractor situation mixed up, there’s no need to worry! Find out next how the IRS classifies each work status so you can make the right decisions for your business with confidence.
How the IRS Classifies Workers
The IRS looks at three distinct factors when determining if someone is an employee of your business or an independent contractor. They examine 1) behavioral control, 2) financial control, and 3) the relationship between the parties. What does this all mean? Let’s break it down.
When it comes to behavioral control, the IRS will want to know if you’re telling the worker where to be, what time to be there, and what they should be working on. If you are, there’s a good chance this person is your employee, and the IRS will see it that way. For financial control, the IRS will look to see if your worker is providing the same services to other similar businesses or only for you because you supply them with the tools they need to do the job.
Finally, the IRS will also examine the relationship between you and this person. Do you have an independent contractor agreement with them? Are you offering them employee-related benefits like health insurance and vacation pay? If so, that’ll indicate to the IRS that this person is your employee and not an independent contractor.
Admittedly, there are gray areas. In these instances, the IRS will examine the circumstances of each case and make a determination. Therefore, you should be sure to dot every I and cross every T when it comes to your work relationships. Doing so will leave less up for question.
A Final Word From Tuesday P Brooks Owner of AJOY
Since the IRS views employees and independent contractors differently (thus impacting how much you will have to pay in taxes), it’s vital that you make educated decisions when it comes to hiring and how you will classify your workers. Using the criteria mentioned above, you can make sure that the treatment of your workers aligns with the classification that works best for your business. Right? Right! Armed with this knowledge, you’re invincible and bound to make the best decisions you can for your company. Wishing you all the best!