Employee vs. Independent Contractor
How to Correctly Classify Workers and Avoid IRSEmployment Tax Audits
Employers must beware of the federal and state crackdowns on the use of independent contractors to avoid payroll tax problems and employment tax audits. But how do youdistinguish between independent contractors and employees? More importantly, how does the
IRS determine who owes unpaid employment taxes and who doesn’t?
Consider these tips to makecorrect determinations of worker classifications and avoid the wrath of IRS audits for unpaid employment back taxes and payroll tax problems.
owed. While some companies deliberately misclassify their workers in order to escape offeringhealth insurance and 401K plans to their employees, somebusiness ownersare flat out confusedas to how to correctly classify their employees. How do you distinguish between independentcontractors and employees? More importantly, how does the IRS determine who owes unpaid
employment taxes and who doesn’t?
There’s a 20
-point common law test, internal revenue code section 5-30, that determines whethera person is an employee or an independent contractor. So even though you may be treating aperson as an independent contractor, in the eyes of the IRS and the 20-point common law test,that may not be the case. When making determinations of worker classifications, consider thefollowing:
Tip #1 for Avoiding Employment Tax Audits for Unpaid Employment or Payroll Taxes:
Ask yourself, “Who’s in charge?”
In business audits, the IRS uses three general criteria to determine the relationship betweencompanies and workers:
Behavioral Control - does the business direct or control how the work is done and whathours the employee works?
Financial Control - does the business direct or control the financial and business aspectsof the worker?
Type of Relationship - how do the worker and business owner perceive their relationship?The employment tax audit bottom line - if the company is determining only what work is done,
their workers are probably independent contractors. On the other hand, if they control not only
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