Tax Question: Independent Contractors or Employees?

Many small business that are getting ready to file their taxes wonder whether their workers should be counted as employees or as independent contractors. I wanted to quickly point you to information from the IRS on the subject.

Enjoy!

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Are your workers independent contractors or employees? The answer can have a profound impact on how much tax you pay as a small business owner. Knowing whether your workers are or are not employees will affect the amount of taxes you must withhold from their pay. It will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.

Employers who misclassify workers as independent contractors can end up with substantial tax bills as well as penalties for failing to pay employment taxes and failing to file required tax forms. Workers can avoid higher tax bills and lost benefits if they know their proper status.

Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

Generally, whether a worker is an employee or an independent contractor depends upon how much control you have as a business owner. If you have the right to control or direct not only what is to be done but also how it is to be done then your workers are most likely employees. If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.

Three broad characteristics are used by the IRS to determine the relationship between businesses and workers – Behavioral Control, Financial Control, and the Type of Relationship. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

Knowing the proper worker classification can be critical to your business. Don’t guess. Act now to make certain you know for sure.

You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, and Publication 1779, Independent Contractor or Employee. Both of these publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).

Links:

* Contractor vs. Employee
* Publication 1779
* Publication 15-A

Shoeboxed in the Washington Post!

Last week I had a great conversation with Sharon McLoone, who writes about small businesses for the Washington Post. She wrote about us today in a great story that you can read here:

Shoeboxed in Washington Post

Here is an excerpt:

Shoeboxed’s goal is to make it easy for a consumer to digitize, organize, analyze and export receipts, which the company says can cause stress and harm the environment. Customers can organize receipts themselves for free online on the Shoeboxed Web site or try out a premium service that allows them to send in receipts to the company, which scans and uploads them to an account where they can be imported into a spreadsheet or exported to different programs like Quicken.

Also, we wanted to give a shout-out to Vivimedia, one of our small business clients who was also interviewed in the story. They are a creative services agency, and you can check out their website here.

This is what they had to say about Shoeboxed:

Reconciling receipts and accounts was the worst job I was doing on a regular basis as a small business owner. We’re not accountants. We’re artists. And now we can work on the stuff we like to work on.