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Employer Taxes Add Up with Wrong Classification

Employee, or Freelancer?

When a businessperson begins hiring employees, it’s a sign that business is picking up and sales are on their way up. But don’t make the costly mistake of classifying your workers as independent contractors when they should be labeled as actual employees. The IRS can force you to pay back payroll, Social Security and Medicare taxes. That doesn’t include unemployment taxes, either. So, make sure to get it right.

Some questions to ask when classifying workers include:

  • Does the business have control over what the worker does and how his or job is performed?
  • Is there an employment contract? Benefits for the worker? Is the worker’s job a key part of the business?
  • Does the payer control business aspects of the worker’s job? These aspects include how the worker is paid, if expenses are reimbursed and how supplies are provided.

When it comes to classifying workers as either employees or independent contractors, there’s no magic formula. Some factors may point toward employee; others toward contractor. If you need help, you can always fill out IRS Form SS-8 and let the IRS make the call. Be patient, as the decision can take months.

You may save a few bucks by classify your employees as independent contractors, but chances are the IRS will probably find out. And if they do, it’s not pretty. Your business can be subject to an IRS audit and paying a significant amount of back tax debt is likely. If and when that day comes, make sure to have a tax attorney on your side to increase your chances of resolving your liability fairly.

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