You may have had the opportunity to hire someone to work for you that you did not consider an employee.  For an example, maybe you hire someone to answer the phone after hours for emergencies.  This person could be called an independent contractor. 

The reason a business may want to have someone classified as an independent contractor versus an employee is the extra time and money that is spent in paying payroll taxes, unemployment insurance, etc.  With an independent contractor, it is like paying another business for their services.  They are held accountable for their products or services. 

Unfortunately, there are many instances that a business calls an employee an independent contractor just to achieve the same benefits.  The government is always on the lookout for this type of situation.  Therefore, there are a number of questions you must ask yourself before you classify someone as a contractor or employee.

Ø      Who provides the training?

Ø      Who designates how the task will be performed?

Ø      Does the worker have their own business?

Ø      Are the worker’s expenses reimbursed?

Ø      Can anyone else hire the worker for their business?

Ø      Can the worker make a profit or loss in their business?

Ø      Are their any written contracts?

Ø      Is the worker eligible for employee benefits?

There are many factors to consider when deciding if a worker is an employee or independent contractor.  When conducting a payroll tax audit, the Internal Revenue Service asks the questions of the relationship between the worker and the business.  After they have taken all factors into consideration, they will make a judgment as to whether the business relationship is in fact business to business, or business to employee.

 If you are a little unsure after you answer the questions above for yourself, y ou can have the Internal Revenue Service make the decision for you.  Form SS-8 should be filed with the Internal Revenue Service.  After careful review, they will send out a letter stating their opinion based on the answers to the questions that you provide and submit on form SS-8.  There is no fee for this service.  When the letter is received, you should keep it in a safe handy place.  If you ever have to go through an Internal Revenue Service payroll tax audit, you will be very glad you did. 

Without correctly classifying someone as an employee or independent contractor, you could be setting yourself up for a very large tax bill in the future.  Saving a little money right now may seem like a wise move and you may beat the system for a while, but in the long run, you may loose a great deal more.

Don’t guess.  Find out the correct information.