If 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.

Setting up your business to minimize your tax burden is key to your success. Working with independent contractors rather than hiring full-time or part-time workers might be optimal for your business. But choosing this route requires knowledge of the tax code and strategic execution.

Clarifying Classification Requirements

Essentially, federal income tax law centers on three categories: behavioral control, financial control and the relationship of the parties involved. Additionally, Wisconsin and Minnesota have unique laws regarding independent contractor status versus employee status.

Instead of trying to fully digest the various tax codes at play here, the following questions should be addressed when attempting to identify whether a worker is an employee or an independent contractor:

• Who controls when, where and how work is performed?
• Do you, the employer, provide supervision, training, materials or all of these?
• Is the worker paid a set fee per project or an hourly wage?
• Do both parties invest and bear financial risk?
• Are any written contracts in place?

Get Help When You Need It

Trying to research proper worker classification can lead you into an intricate maze. If you feel more than a little lost when it comes to the subject of employee versus independent contractor, know you are not alone. And know that there is help. You can reach out to a knowledgeable business law attorney who can assist in you all facets of worker classification, as well as all other aspects regarding how you run your business.

Tags: employment classification, tax, audit, employee, contractor, IRS, attorney, lawyer