Misclassifying an employee as an independent contractor can result in costly consequences that can be detrimental to your business. As the employer, you may become liable for the payment of taxes, including federal income tax, social security tax, Medicare tax, federal unemployment tax and state unemployment tax.
Certain factors will classify a worker as either an employee or as an independent contractor.
The IRS determines employee and independent contractor status based on the following three, broad criteria:
Employees (sometimes called common law employees) are individuals who work for an employer that controls the work — when the work is performed and how it's performed. The individual is hired into your organization on a permanent basis and is subsequently paid periodically through the main payroll system. That means you’re also expected to deduct various obligatory amounts from their gross pay every single time you remit their compensation—for example, payroll and social security taxes.
An independent contractor is an individual who performs services for you, but you control only the result of the work. Independent contractors, are basically third-party entities that you engage on temporary terms, without absorbing them into the company’s workforce, and they’re ultimately paid without deductions.
If you’re unsure how to classify a worker, please reach out to us—we want to help you make the right decisions.