There can be huge penalties for incorrectly classifying your employees. It can seem tempting to pay someone as an independent contractor because then all of the payroll tax burden goes on the employee, but if the IRS catches you and finds it was intentional, the penalty could be 100% of what you failed to pay in the first place (and you still have to pay the taxes, so it’s really 200%).
Not only could your company have to pay that, you might be personally responsible for the same fine, because the IRS can also assess the penalty on company officers too.
If you’re the employee in this situation, you need to know that the employer can’t try to get back tax money they were supposed to withhold. Nope, it’s their problem now.
Now, if you don’t remember what the differences between contractors and employees is, here are some points to remember while classifying employees:
- Generally, when a company hires an independent contractor, the company specifies an end result, but the contractor chooses how they will reach that result.
- Behavioral Control: If the company trains a worker to do a position, or there are multiple evaluations throughout the process, or if there are lengthy instructions and specifications on tools, those are all indicators of an employee relationship.
- Financial Control: If the company invests in the equipment to do the job, reimburses some expenses, and pays the worker regularly, those are further indications of an employee relationship.
- Relationship: Businesses providing benefits such as insurance, pension, vacation or sick pay and employment with no end date are more signs of an employee relationship.
If you have questions or concerns about how to classify an employee, or something else related to this topic, let us know and we’ll do our best to advise you.