That is a common misconception that can be costly to a business. The distinction between a contractor and an employee is extremely important for a small business owner to understand. How you classify workers is critical. A misclassified worker may cause you penalties plus interest from the IRS or state department of revenue.
How can you tell if your worker is a contractor or an employee? Here are three simple questions that can help you differentiate the two.
- Do you tell the worker how, when, or where to do the work? Yes – then the worker is an employee.
- Do you tell the worker where to purchase supplies? Yes – then the worker is an employee.
- Do you tell the worker what time to arrive and leave? Yes – then the worker is an employee.
There is no one simple rule, but the IRS does have some guidelines
to help employers determine the workers status.
Misclassifying a worker can result in penalties plus interest for the employer.
When the IRS is looking at the relationship between a worker and employer they will use the 20 guidelines as well as any contract that would demonstrate an independent contractor classification. A contract would generally outline the terms of the relationship between the employer and the individual.
Consulting with your accountant or attorney is advisable when classifying a worker as an employee or contractor.
Correctly classifying an employee prior to them performing services can save the business from a lot of emotional and financial heartache down the line.
If you have any questions or concerns regarding your workers classification status feel free to call The Digital CPA
and we will be happy to answer any questions or concerns that you may have.