You can generally classify people who provide services for your business as independent contractors or employees. How you classify each service provider depends on a number of factors, and there is not a simple checklist to determine whether a person is an employee or contractor.
Typically, the more control your business has over a worker, the more likely it is that the person is an employee.
The IRS looks at how much independence the person has when it comes to:
- Behavior – Does your company have the right to control what or how the worker does the job?
- Financial – How is the worker paid? What type of expenses are reimbursed? Who provides the tools for the job?
- Relationship – What type of relationship do you have with the worker? Does the worker have any type of benefits?
Why is classifying workers correctly important?
As an employer, classifying a worker as an independent contractor instead of an employee saves you money on taxes for that person. However, the IRS will hold your business liable for employment taxes if the worker is misclassified. There could be serious consequences for your business when you do not treat workers correctly for tax purposes.
If you have workers who you have classified as independent contractors, make sure that you have classified them correctly. You can request the IRS review the business relationship by filing Form SS-8, which takes about six months for an answer. If you use independent contractors often, you should document carefully each factor for how your business determined the classification.
Have an advocate when you deal with the IRS
If the IRS has challenged your business’s classifications of workers, you may want to discuss your situation with a business attorney before you proceed. Your business can work with the attorney to present the information and documentation to the IRS to find the best possible outcome for your case.