Today’s workforce is a gig economy. According to a study by intuit, by 2020 40% of American workers will be independent contractors.
Independent contracts can save businesses from the cost of benefits, office space, taxes and many other perks given to employees. Becoming an independent contractor can be very attractive to the individual performing those services as well because of the flexibility over their schedule and the choice in the work they will perform.
Today’s gig economy doesn’t come without implications. Many businesses still employ people and will continue to do so. It’s important to understand the effect of classifying individuals as employees or independent contractors. Many business owners fail to recognize the effect of classifying an individual as an employee or independent contractor. If you have misclassified the individual, you could expose yourself to significant tax liabilities.
As described by the IRS, an employee is anyone who performs services for you where you can control what will be done and how it will be done. Classifying workers as employees requires that a company withhold applicable Federal, state and local income taxes, pay Social Security, Medicare taxes, state unemployment insurance tax and pay any workers compensation fees. Employee status also requires filing a number of returns during the year with various taxing authorities and providing W-2’s to all employees by January 31. Not to mention, employees may also have rights to benefits such as vacation, holidays, health insurance or retirement plans.
Over the years, we have come to learn that there are a number of common myths that you should avoid in classifying your workers. The more frequent inappropriate decisions to classify an employee as an independent contractor include:
The IRS notes that simply because a worker does assignments for many companies does not necessarily suggest independent contractor status. The determination of whether a worker is an employee or an independent contractor rests primarily upon the extent that the employer has to direct and control the individual with regard to what and how an activity is to be accomplished. Generally, the employer controls how an employee performs a service. On the other hand, independent contractors determine for themselves how a given assignment is to be completed.
To aid business owners, the IRS has developed tests to be used as guiding points to indicate the extent and direction of control present in any employer/employee/independent contractor situation. The degree of importance of each factor varies depending on the occupation and the facts of the particular situation.
IRS Control Test
1. Behavioral Control
Employee status is determined when the business can direct and control the work performed by the worker. Consider:
2. Financial Control
If the business can direct or control the financial and business aspects of the worker’s job, it may suggest employee status. Consider:
The type of relationship is dependent upon how the worker and business perceive their interaction with one another. Consider:
In addition, the Voluntary Classification Settlement Program (VCSP) offers certain eligible businesses the option to reclassify their workers as employees with partial relief from federal employment taxes.
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