The Internal Revenue Service recently issued Fact Sheet 2015-21 which encourages employers to think about the classification of those workers they pay. Are those workers employees? Are those workers independent contractors?
The IRS is very interested in this issue as there are many taxes that are triggered by employment.
The most common is the Social Security and Medicare tax that the employer must pay. The overall tax is 15.3% of total wages (up to $118,500 for the social security portion) and the employer must pay half of that. It is the single biggest largest tax (in dollar terms) that most people pay. And, employers would sure love to escape that tax.
The IRS suggest that you to fill out form SS-8. Turn that form in and they will give you a determination within six months. Be advised that more than likely it will be in favor of the employee determination rather than the contractor determination.
There are actually some pretty simple common law rules that this “fact sheet” mentions.
1. Behavioral. Does the business owner control?
2. Financial. Are the business aspects of the worker’s job controlled by the business owner?
3. Type of relationship. Are there written contracts?
The first two are often called “means and methods”. If the worker controls the means (the financial responsibility) and the methods (the manner in which the job is carried out) then more than likely you do have a contractor relationship.
But, that needs to be followed up by a real CONTRACT! This is the document that many employers forget. In fact, if you have a contract spelling out the details of the work and the amount paid for the work, then you will probably win any employment vs. contractor dispute.
The financial/tax implications are huge. If you are determined to be an employer after many years of not withholding these social security and Medicare taxes, the penalties and fines can be enormous.
Be safe. Understand the law.
And as always, feel free to contact us for any help on this issue.