Workers Who Aren’t Employees: Tax and Legal Issues to Consider

As the economy improves, you may be reluctant to hire new employees but still need extra help to meet increased demand. Some alternatives: independent contractors, temporary workers, or even summer interns. Be sure you understand the tax and legal issues before engaging this type of help.

Independent contractors
IRS worker classification. One of the hottest audit targets is worker classification. You may treat a worker as an independent contractor (IC) because you believe this is the correct treatment, but the IRS may think otherwise and reclassify your worker is an employee. Result if the IRS is correct: You could owe back employment taxes, plus interest and penalties. You may also owe back state unemployment taxes as well as be liable to the worker for fringe benefits, such as medical coverage and retirement plan contributions. Total cost for misclassification can break the bank. What to do:

• Use the correct classification. This depends on your degree of “control.” If you have the right to say when, where, and how the work gets done, the person is your employee, regardless of any label you may use or whether you actually exert such control.
• Be consistent. If you are using workers as ICs and have done so for years, treat others you hire in the future doing similar work in the same way.
• Use an IC agreement. While the agreement itself does not bind the IRS to your choice of classification, informing your worker that he/she is obligated to pay taxes and not eligible for employee benefits is important information to communicate in writing.
• Issue Form 1099-MISC. If you pay an IC $600 or more in total for the year, be sure to give the person this information form. It shows the company’s classification of the worker and can help to minimize penalties if it later turns out that your classification was incorrect.

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Barbara Weltman

Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s Small Business Taxes, and trusted professional advocate for small businesses and entrepreneurs. She is also host of Build Your Business radio and the publisher of Idea of the Day℠ and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com.

One Comment on “Workers Who Aren’t Employees: Tax and Legal Issues to Consider”

1. thise sounds intereasting you see i am trying to set up my own business and i wount to sell every thing whole sale resale and thise seem like it can generate me some capital i have not set up my web page yet but i’m woking on i regestered my name of my distributing companey and going to open up a acount how can you help me futher my business or exspand

   

   Mico Folkes

   October 27th, 2009
   at 6:56 am

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