Accounting Services

Employee Vs. Independent Contractor – How Do I Know the Difference?

When you hire someone to help you with your business, one of the first things you’ll do is complete paperwork, part of which designates them as either an employee or an independent contractor. You’ll want to be sure to get this right as the IRS is taking action to crack down on misclassified workers.

Why does it matter?

Classification of a worker as an employee or an independent contractor has important legal ramifications.

For instance, an employer does not withhold income or payroll taxes from independent contractor earnings.

Secondly, independent contractors do not receive the protections of employment and labor laws that benefit employees of a company.

How do I know if the person that I hired is an employee or independent contractor?

The IRS has certain tests that they use to help taxpayers understand when a person is an employee versus an independent contractor such as the right to control test. A CPA in Madison, WI, can provide you with accounting services that designate all this for you. Here are some questions you can ask to help you to make an assessment, though:

  • Who controls the business aspects of the project or job? For example, will they determine how the worker is paid or reimbursed for expenses?
  • Does the worker use their own tools and supplies to perform the tasks?
  • Does the company have a right to control what tasks are completed and how they get done?
  • Is there a written contract and is the worker entitled to benefits of the organization (i.e., retirement, healthcare, etc.)
  • How long will the relationship continue and is the work being completed a key aspect of the business?

Determining how a worker should be classified is key to avoiding a hefty tax bill, interest, and penalties. If you have any concerns, contact a trusted advisor who can help you to make this determination.

If you have any questions about worker classification or any other accounting services, you might want to enlist the services of a CPA in Madison, WI. To more information about these services click here.

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