Thursday, August 17, 2017

Trying To Avoid Paying Employment Taxes By Hiring Independent Contractors? Be Careful!

February 19, 2009 by  
Filed under Tax Law

Usually, the most expensive part of running your own business is hiring employees.  This is because, outside of a salary, an employer must withhold and pay Social Security Taxes, Medicare Taxes, and pay unemployment taxes on those wages.  This is not required if you hire an “independent contractor”.  However, just because you categorize someone as an independent contractor and have a written contract, doesn’t mean the IRS will treat them like one.  Generally, if an employer has control over a person’s work product, business expenses (cost of conducting business) and/or the work performed is a key element of the employer’s business, the IRS will categorize the relationship as an employer/employee relationship.  This means the employer will be liable for all of the employment taxes for that individual… from the beginning.  So if it has been a year since the “independent contractor” has been working for you and the IRS reclassifies them, you will be liable for ALL of the taxes for the entire year (plus interest and penalties).  Obviously, this would be much more difficult to pay as a lump sum than if you categorized your worker correctly in the first place.

Independent contractors who are reclassified as employees may also be eligible to receive back benefits including insurance, retirement, profit sharing and stock options. This could be very costly to a small business, possibly leading to liquidation or bankruptcy.

If you are unsure of how to categorize your worker, you can file a form SS-8 (determination of worker status) with the IRS.  For more information on these rules, click here.

Comments

One Response to “Trying To Avoid Paying Employment Taxes By Hiring Independent Contractors? Be Careful!”
  1. Rich says:

    Transportation is the second largest industry next to the government, but to find advice on the do’s and dont’s is impossible.

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