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The Online Advisor

August 2007


New Business

Is your worker an "employee" or an "independent contractor"?


There’s an ongoing debate that’s almost as old as the tax code itself. If you have people working for your business, should you classify them as employees or as independent contractors?

Classifying your workers as independent contractors generally saves you money. That’s because you avoid paying employment taxes and benefits on their behalf.

In most instances, however, very few of your workers actually qualify as independent contractors. If the IRS determines that you misclassified your employees as contractors, you could end up paying back all of the employment taxes and benefits that should have been paid over the years. Depending on the size of your workforce, the cost to you could be substantial, potentially bankrupting your business.

How can you ensure that you properly classify your workers? Start with the factors listed by the IRS to determine a worker’s classification. If you maintain control over your workers through hiring, training and supervision, scheduling the work to be done, and by providing them with tools and materials, your workers are most likely your employees. The same holds true if you pay your workers a set salary or an hourly wage and have the right to let them go at any time.

As a general rule, if you only have the right to control or direct the result of the work and not the means and methods of accomplishing the result, the individual may qualify as an independent contractor.

If your business employs independent contractors, take steps to protect yourself and your business. The IRS is currently focusing its audit efforts in this employment tax area. Be consistent with how you classify your workers, and follow how other businesses in your industry classify their workers. And don’t forget to send a Form 1099-MISC to any contractor who earns more than $600 from you during the year.

To find out more about properly classifying your workers, please give us a call.

Before you invest in any business, it's always a good idea to discuss the proposed venture with your advisors. If you would like assistance with evaluating a business opportunity or with legitimate tax planning, please call our office.

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