Avoid IRS Problems Caused by Improperly Classified Independent Contractors

by | Jun 15, 2019 | Bookkeeping

Cutting Corners

When you operate a small business, you cut corners wherever you can. As long as you can avoid IRS problems, an independent contractor strategy will help you meet your cost-saving goals. When properly selected, independent contractors can do the work employees usually do.

You save money because independent contractors cost less than employees, primarily because of the benefits you pay.

  • Employees enter the job market with high expectations. They want enough income to support their families. They also want sick pay, vacation pay, health insurance, and paid personal days.
  • Independent contractors enter a working relationship understanding that they will receive pay but no benefits. They work for an hourly wage or a per job payment only.

The Contractor vs Employee Dilemma

Some businesses fail to avoid IRS problems because they treat some workers like employees but pay them like contractors. The cost savings make it easy and advantageous to get pulled into that dynamic.

If you don’t understand the difference between an employee and a contractor, it’s mostly about control. IRS guidelines can help you determine if your contractors are actually employees. They focus primarily on three areas of control

  • Behavioral Control: You determine behavioral control based on the type and degree of instructions you give, your evaluation system, and your training.
  • Financial Control: You have financial control over a worker when you control their significant investments, expenses, profit and loss opportunities, service availability and payment methods.
  • Type of Relationship: You may call a worker a contractor but your type of relationship is actually defined by written contracts, employee benefits, relationship permanency, and services provided.

The IRS May Punish You If You Get It Wrong

Furthermore, when you misclassify an employee, it eliminates your responsibility for employee withholding FICA, Unemployment taxes, and possibly health insurance under the Affordable Care Act. To take away the financial incentives for intentional misclassification and trying to avoid IRS problems, the IRS established a schedule of penalties. In fact, these include a fine for each W-2 not submitted resulting in a fine based on the percentage of unpaid taxes and other potential penalties.

The IRS also created a way out if you choose to come clean. The Voluntary Classification Settlement Program gives employers an opportunity to correct misclassification errors. Any settlement must include a promise that you will not misclassify future employees.

Contact Goode Bookkeeping & Consulting

If you’d like to know more about IRS Guidelines for proper employee classification, call us at (860) 659-6543 or complete our consultation request.

When you operate a small business, you cut corners wherever you can. As long as you can avoid IRS problems, an independent contractor strategy will help you meet your cost-saving goals. When properly selected, independent contractors can do the work employees usually do.

You save money because independent contractors cost less than employees, primarily because of the benefits you pay.

  • Employees enter the job market with high expectations. They want enough income to support their families. They also want sick pay, vacation pay, health insurance, and paid personal days.
  • Independent contractors enter a working relationship understanding that they will receive pay but no benefits. They work for an hourly wage or a per job payment only.

The Contractor vs Employee Dilemma

Some businesses fail to avoid IRS problems because they treat some workers like employees but pay them like contractors. The cost savings make it easy and advantageous to get pulled into that dynamic.

If you don’t understand the difference between an employee and a contractor, it’s mostly about control. IRS guidelines can help you determine if your contractors are actually employees. They focus primarily on three areas of control

  • Behavioral Control: You determine behavioral control based on the type and degree of instructions you give, your evaluation system, and your training.
  • Financial Control: You have financial control over a worker when you control their significant investments, expenses, profit and loss opportunities, service availability and payment methods.
  • Type of Relationship: You may call a worker a contractor but your type of relationship is actually defined by written contracts, employee benefits, relationship permanency, and services provided.

The IRS May Punish You If You Get It Wrong

When you misclassify an employee, it eliminates your responsibility for employee withholding, FICA, Unemployment taxes, and possibly health insurance under the Affordable Care Act. To take away the financial incentives for intentional misclassification and trying to avoid IRS problems, the IRS established a schedule of penalties. These include a fine for each W-2 not submitted, a fine based on the percentage of unpaid taxes, and other potential penalties.

The IRS also created a way out if you choose to come clean. The Voluntary Classification Settlement Program gives employers an opportunity to correct misclassification errors. Any settlement must include a promise that you will not misclassify future employees.

Contact Goode Bookkeeping & Consulting

If you’d like to know more about IRS Guidelines for proper employee classification, call us at (860) 659-6543 or complete our consultation request.

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