As a small business owner, it is essential that you correctly classify your employees as either employees or independent contractors. Classifying employees is crucial to payroll because employees will receive different benefits and taxes depending on their classification. Before you understand the importance of correctly classifying employees, you must understand the differences between an employee and an independent contractor. Read on to learn what makes these two classifications different.
The Independent Contractor Classification
As defined by the IRS, an independent contractor is a payer who has the right to control the job results but does not have the right to what is going to be done and how. If you are self-employed or a gig worker, you are an independent contractor. Typically, any individual in an independent trade, company, or occupation in which they offer services to the public are considered independent contractors.
The Employee Classification
If you can monitor what is going to be done and how it will be done, anyone who provides work for you as the employer is your employee. When you have the right to control the details of how the services are performed, you are directing the actions of employees.
If you still have difficulty classifying employees, the IRS utilizes three categories to help you determine employee classification: Behavioral Control, Financial Control, and Relationship of the Parties. You can find more information here.
The Consequences of Incorrectly Classifying Employees
If you classify employees as independent contractors with no basis for doing so, you will not pay the appropriate employment taxes to your state government programs, including state unemployment insurance and pension programs. If you misclassify an independent contractor as an employee, you are now responsible for paying their payroll taxes when the contractor is typically responsible.
Additionally, misclassified workers can also be refused access to minimum wages, holiday payments, parental and medical leave, unemployment insurance, and other services or legal protections.
When hiring new workers, always check with IRS qualifications to determine whether you are classifying employees correctly.
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