Business owners are required to correctly establish whether the persons working for them are employees or independent contractors. There are two kinds of workers in any company: the employee who is hired on a permanent basis and the independent contractor who works on contractual basis. An employer may need a few permanent employees, and then seek some more independent contractors to meet its staffing needs at the same time cutting down on business expenditure. There are rules though, provided by IRS, on how employment of employee or independent contractor should be done.

An independent contractor is defined as a person who offers services for a business but is not considered an employee of that business by the state or federal tax authorities. When a business uses the services of an independent contractor, they are not required to pay taxes for that employer withhold their employee’s tax shares or process their payroll checks. This is seen as lost revenue by the IRS and state revenue department, and the two bodies are trying hard to minimize it. The only way they can do it is by establishing whether all employees who are registered under independent contractors are truly independent contractors or employers are misclassifying them.

IRS recommends just a few independent contractors in a business that requires more employees but some employers ignore this directive and goes on to hire more contractual workers even in areas where they need employees. Some employers are unaware that some of the workers they term as independent contractors are actually actual employees and IRS could come after them for interest, unpaid tax liability and other penalties. To avoid this, businesses need to determine whether their workers are actual employees or independent contractors. There are other independent contractor requirements that should be met.

IRS has provided factors that businesses can use in establishing the amount of control an employer has over an independent contractor vs employee, as a way to determine where to classify your employees and independent contractors:

• Whether or not the company has control or has the right to control the behavior of the employee, what they do and how they work in their job
• Whether or not the business has financial control over aspects of the worker’s job
• Whether or not there are written contracts or the employee enjoys benefits such as pension plan and paid vacation among others. Does what the employee do a key aspect of that business?

There are also other factors to consider such as how does an independent contractor pay taxes? Or how do independent contractors get paid? If after doing all that an employer is still unable to establish whether their employees are self-employed contractors or employees, IRS recommends the filing of Form SS-8, the form for Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The filing can be done by the worker or the employer. After the filing, IRS will review all the facts and circumstances, then determine the status of the worker. Note that the determination could take up to 6 months.