By: Nancy Mehlberg - CVB EA, Principal, SVA Certified Public Accountants
Properly classifying individuals who perform services for your company is critical to avoid penalties and issues with the Department of Labor (DOL) and the Internal Revenue Service (IRS). Misclassifying can land you in big trouble as the IRS has stringent definitions to determine which is the appropriate classification.
Independent Contractor vs. Employee
According to the IRS, the definition of an independent contractor or an employee depends on the relationship between the worker and the business. Generally, there are three categories to examine:
An agreement (or contract) between a business and an individual does not mean they are truly an independent contractor. They must meet the requirements of an independent contractor and the appropriate taxing authorities must agree that they meet the requirement.
How Can a Potential Issue be Brought up for Examination?
Red Flags Indicating You May Have an Issue
When working with your independent contractor, here are 5 things you need to avoid:
What Happens if a Misclassification Occurs?
An employer is required to withhold and pay income taxes, Social Security, Medicare, and unemployment taxes for each worker. If it is deemed that the individual is an employee, the underpayment of these taxes can result in large balances due as well as penalties from the IRS.
Do Your Due Diligence
If you have independent contractors, consult with an outside advisor to have them review your contracts. Taking the time for a review could save you significant dollars in the future. Better safe than sorry!