Recent California legislation has altered the criteria for designating hires as employees or independent contractors.
The financial repercussions of worker misclassification can be expensive, so this is probably a good time to re-evaluate your workforce’s status.
What is the fundamental difference?
According to the IRS, the difference between employees and independent contractors is the level of control your company has over the worker.
For example, if you set specific rules on how your workers must do their jobs, regulate how they receive payment and plan to keep them indefinitely, they are likely classified as employees. Alternately, independent contractors generally work on specific tasks, achieve the desired result in their own manner and collect payment on their terms.
Why is the distinction important?
The primary reason for the different classifications is in the method of tax collection. Independent contractors are responsible for paying their own taxes. Typically, your only obligation is to report to the IRS how much you paid them during the tax year.
However, you must withhold and pay the various employment taxes for each employee you have on payroll. If the IRS finds that you have employees misclassified as independent contractors, you may receive an order to pay back employment taxes.
How can I get help with the decision?
The distinction between employees and contractors is not always clear. IRS Form SS-88 can help if you are not sure of a worker’s status or plan to continue hiring for similar duties. After examining detailed responses regarding the specific nature of the behavioral and financial relationship your company has with the worker, the IRS will return a decision for you. Should you discover that you need to reclassify the independent contractors you have been hiring as employees, The IRS Voluntary Classification Settlement Program might offer some relief for unpaid employment taxes.
