Business owners may find it difficult to tell the difference between an independent contractor and an employee. Contrary to popular belief, the variations are actually quite significant; the IRS determines the guidelines, and following them is an important part of being a filing your taxes. In order to find out whether or not your hiree is an independent contractor or an employee, read on.
Determine the Degree of Control
There are three general guidelines the IRS uses to classify workers. The first is behavioral control; if your business has the ability to control what the worker does and how the worker completes their work, the worker is most likely an employee. A good way to tell if your business has behavioral control is to determine whether or not there has been any job training–this indicates the worker is an employee. The next thing is financial control, which considers things like how the worker is paid, whether expenses are reimbursed and who provides tools and supplies. The next part is to consider is whether or not the worker has a guaranteed and steady income; an independent contractor usually has a set fee to cover operational expenses. Then, depending on the service, there are more costs added for labor. Independent contractors should generally cover their own expenses and invoice their clients for the services they provided. Lastly, consider the type of relationship you have with the worker. Are you hiring them for the long-term? Have you presented them with benefits? This means the worker is an employee. It’s important to note that the The IRS is not required to follow any written contract you create that says the worker is an independent contractor. whether or not the worker is an employee or an independent contractor.
What if I Can’t Tell?
It’s not uncommon to feel unsure about your decision. However, the IRS presents a solution. If you aren’t sure about the relationship you have with your worker, you can file the Form SS-8. This determines whether or not a worker is an employee or an independent contractor on an official document. A worker or an employer can fill out this form. But be aware–the IRS may take up to six months to process this form. You will never get in trouble for classifying a worker as an employee, so that’s safest course of action if you aren’t sure and can’t wait for an SS-8 ruing.
Before you start to pay your independent contractors, collect their W-9s. You aren’t required to submit this to the IRS, but you’ll need the information later for 1099s. Because these independent contractors are able to claim more deductions, it’s very important that you get their W-9s first. Misfiling them as an employee can mean you’ll be liable for the employment taxes. Paying an independent contractor more than $600 during a tax year means you are required to send a 1099 to the IRS.
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