Do you have employees or independent contractors?

Business owners (especially new ones) often look toward independent contractors to help complete their work. If you have an outside person who does an occasional project with you, independent contractor status is probably just fine.

But if you've got a person who is working regularly with you, often at your place of business, you must be careful when trying to pay them as an independent contactor. It's attractive to have a contractor, because the company doesn't have to pay payroll taxes or do a bunch of quarterly paperwork.

Unfortunately, many times these people should be legally classified as employees, not as contractors. The IRS takes a very hard line on this issue, mainly because independent contractors skip out on their tax responsibilities more often than companies do.
How do you know if you should be paying the person as an employee? The IRS offers fairly straightforward guidelines about this issue, and they all have to do with control. Do you control the person's work hours and work activities? Do you provide the place and the materials needed to do the job? Do you give instructions and directions on how to complete the work? Does the person have other "clients" that she works for, or are you her only one?

Don't make the mistake of thinking it's easy to get around this control issue. It's not. By giving a person a flexible schedule and saying that she's free to make her own hours, that doesn't make her a contractor. When in doubt, speak to your lawyer and accountant about this issue. If you're caught paying an employee as an independent contractor, the IRS can make you pay all back payroll taxes plus sizeable interest and penalties.
Read Full Story