For small business owners, it is critical to correctly determine whether the individuals’ providing services are classed as employees or independent contractors. Unfortunately, for busy small business owners such as you, the IRS definitions employee and contractors can be complex and confusion. Fortunately, for busy small business owners, TSAT is here to help!
Let’s start with the basics:
According to the IRS, “An employee is generally considered to be anyone who performs services, if the business can control what will be done and how it will be done.” What matters is that the business has the right to control the details of how the worker’s services are performed.”
According to the IRS, “Independent contractors are normally people in an independent trade, business or profession in which they offer their services to the public. Doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers or auctioneers are generally independent contractors.”
TSAT explores the differences a little further:
Now, let’s determine whether a worker of your small business is an independent contractor or an employee. TSAT suggests to examine closely the relationship between the worker and your small business, generally there are three worker/business relationship categories to review:
- Behavioral Control – does your small business control or have the right to control what he worker does and how the worker does the job?
- Financial Control – does your small business direct or control the financial and business aspects of the worker in question job? Furthermore, are the business aspects of the worker’s job controlled by you? (Things like how the worker is paid, are expenses reimbursed, who provides tools/supplies, etc.)
- Relationship of the Parties – are there written contracts or employee type benefits (i.e. insurance, PTO, etc.)? Additionally, will the relationship continue and is the work performed a key aspect of your business?
If the your worker fits into these categories, they are not an independent contractor. Here at TSAT we understand that is a lot to take in for a small business owner. However, it is important to correctly classify your employees, your contractors, and yourself correctly.
So, by now you may be wondering, what happens when a worker is misclassified? Well…
Misclassifying workers as independent contractors adversely affects employees because the employer’s share of taxes is not paid, and the employee’s share is not withheld. If a business misclassified an employee without a reasonable basis, it could be held liable for employment taxes for that worker. Generally, an employer must withhold and pay income taxes, Social Security and Medicare taxes, as well as unemployment taxes. Trust us, you want to avoid this headache. TSAT is the trusted solution for your small business accounting needs!
Take a look below for a visual breakdown:
Next week, we’ll look at the Self Employed and the new trend sweeping the country, Gig Economy Workers. Stay tuned!
If you are a small business owner looking to grow your business, TSAT’s AMAZING team considers much more than just your taxes!
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