As business owners know all too
well, hiring an employee costs more than just paying a salary.
Employers
generally provide benefits to employees, which can be expensive. Moreover,
employers must pay a share of Medicare, Social Security, and state unemployment
taxes.
None
of the above applies when your company hires an independent contractor—a
publicist to get your company’s name in the news, for example, or a freelance
website designer. You pay these people the agreed-upon amount and let them
worry about funding their retirement or handling payroll tax. If that’s the
case, why not just use a group of independent contractors to work for your
company and do with few or even no employees?
Defining
the difference
The answer is that the IRS is
well aware of the advantages of using contractors. Therefore, the IRS has
established rules governing how independent contractors are classified, as
opposed to employees. Drilling down, the major difference is a matter of
control.
Hiring
an independent contractor to do a specific task is fine. You tell the contractor
what you want done, and you pay for results. However, if you tell the worker
how and when and where the work is to be done, you risk having that worker
re-cast as an employee by the IRS.
In
some cases, common sense will apply. If that freelancer works on your website
while doing other paying jobs for other companies, chances are the IRS will go
along with independent contractor classification. On the other hand, if you
have a person who works from home as a freelancer but works only on your
website, does it more or less full time, and takes direction from your IT
people, you may have a difficult time treating him or her as a contractor.
If
you have been misclassifying employees as contractors, the penalties can be
steep. Our office can discuss your workers with you, letting you know how to
proceed in order to legitimately treat them as independent contractors.
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