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Employees vs. Independent Contractors: What About Taxes?

employee-contractorIf you own and operate a business, you must be mindful of the relationships you have with individuals who perform work for you. For instance, if you choose to hire employees, you take on the responsibility for withholding their taxes. You can avoid that withholding if you choose to instead purchase services from people who work independently.

Federal and state laws distinguishing independent contractors from employees are complex. Are you confident that you are on safe ground with the IRS when it comes to employment classification?

The Financial Pitfalls of Misclassification

Misclassification of an employee or independent contractor can lead to dire financial consequences for your business. For instance:

  • If you mistakenly categorize employees as independent contractors, you could face serious financial consequences. An audit or complaint may make you responsible for the income tax, Social Security, Medicare and unemployment withholding you did not withhold at the time the services were performed. Penalties may also apply.
  • Employees who believe they have been misclassified as independent contractors sometimes file lawsuits against their employers. Defending against an employment lawsuit is costly, even if you win.

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