Employee or Independent Contractor?
I see a lot of mistakes being made with this topic, so I’d like to discuss the challenging decision as to whether an individual is an employee or an independent contractor. This can be quite a complex decision at times and there are some great tools for helping you make this decision. Getting it wrong can find civil and/or criminal penalties in your future.
There are significant tax savings to a business if the people in question can be deemed independent contractors rather than employees. Employees trigger tax obligations to the business, specifically employer matching FICA taxes ( social security and medicare) and federal unemployment insurance, whereas independent contractors do not.
Generally here in Massachusetts, if it looks and smells like an employee, it probably is!! Here’s guidance from the state: https://www.mass.gov/service-details/independent-contractors
Note that the state includes potential criminal penalties in addition to the civil economic ones.
Common Law Test
The best way to identify if you have employee’s or independent contractors, is to use the Common Law Test. As the IRS says “Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done.”
More specifically, the test falls into three categories:
The IRS also provides guidance for specific industries such as Building and Construction Industry, Trucking Industry, Computer Industry, Automobile Industry, Attorneys, Taxicab Industry and Salespeople. There are separate tests and rules for Exempt Organizations and for Religious Exemptions and Special Rules for Ministers.
IRS Publication 15-A, Employers Supplemental Tax Guide, offers everything you need to know.
The IRS has also created an entire page dedicated to this complex topic.
Consequences of Treating an Employee as an Independent Contractor
If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker or even criminal penalties.
The tax specialists at PayPros, Inc. can help you with this decision. We would highly recommend you discuss this with your CPA and/or attorney for specific guidance.
For a FREE review of your employee/independent contractor situation, contact me NOW!