As a small-business owner, one of the biggest tax mistakes you can make – other than not filing them at all – is to misclassify your employees as independent contractors. While you must withhold taxes for employees, independent contractors pay self-employment taxes.
The IRS takes misclassification seriously, but the rules can seem vague, and usually the decision boils down to the specific circumstances of the case. What can you do to help ensure the IRS will agree that your workers are self-employed?
1. Allow your workers to decide how they will complete their work
The IRS looks primarily at how much control you have of your workers. Consider whether you provide training or trust the worker as a professional to complete the work correctly. For example, if you hire an accountant to take care of your financial records, you expect him or her to know how to do this without your input. Likewise, if you hire a cleaning service, you probably expect the janitor to come in and do the job without needing any direction from you. On the other hand, you expect your administrative assistant to complete specific job duties in a certain way while also following company policies and procedures.
2. Allow your workers to set their own schedule
Another sign of an employee is a work schedule. If you require your workers to clock in and out at certain times of the day, they may be employees. On the other hand, you may give an independent contractor a deadline, but the worker can decide how to allocate his or her time in order to get the project completed. For example, you may need the accountant to take care of payroll by the first of the month, or you may need the janitor to be done by the time you come in the next morning. However, you are only providing the deadline, not the schedule.
Another factor in allowing your workers to take care of things on their own time involves how you pay them. While you may expect an employee to work 40 hours per week, and you provide a paycheck or salary based on those hours, an independent contractor may provide an invoice for the work itself once the job is completed.
3. Ask whether your workers have other clients
If your accountant also does the books for a couple of other companies, and the janitor cleans all the offices in the building, it is a good sign that they are self-employed. Many independent contractors have two or more clients.
4. Have your workers sign a contract
A contract stating that the worker is an independent contractor may not be enough to prove it to the IRS, but it is a good start. While an employment contract may include a job description, timesheet and employee handbook, an independent contractor contract may include a statement of work, proof of required insurance, licenses and certifications, and invoice procedures.