Watch out: If you are just starting your Small Business, things are still shaky˳ The IRS is watching you more closely˳ New Small Businesses are the most likely to make mistakes˳ One of the biggest problems Small Business has with the IRS is misclassifying their workers˳ If you are found guilty of this, you could face severe penalties˳
Which one? Employees or independent contractors? Your business cannot treat employees as independent contractors˳ Why? Because that would mean you could avoid tax reporting, bookkeeping, and withholding taxes from paychecks˳ And the IRS does not take that lightly˳
Penalties, Fines, & Interest: The penalties imposed for misclassifying workers is severe˳ You may have to pay up to 35% of what you paid to the wrongly classified worker, plus interest˳ That’s on top of the payroll taxes that are still due˳
Classifying Workers: Form 22-8 “Determination of Employee Work Status for Purposes of Federal Income Tax Withholding” includes the following for classifying workers˳
Common Factors Showing The Worker is an Employee:
-They have set hours of work
-You trained the worker to perform in a particular manner
-The worker has the right to quit at will and you have the right to fire them
-You provide significant tools and equipment for the worker
-The worker’s services are part of your business operations
-Your worker cannot hire others to do their work
Common Factors Showing the Worker is an independent contractor:
-The worker is free to work for anyone they choose˳
–The worker hires, supervises, and pays for assistants
-The worker can’t be fired as long as they meet the terms in the contract
-The worker works at their own office/shop
-The worker is paid by the job or is paid commission
Priority: The IRS checks the classification of workers very carefully˳ It is actually a priority if your business is being audited˳ Take these lessons with you˳ Make sure to classify your workers correctly if you want to avoid huge IRS debt˳
Now You Have The Smoking Gun…Use it!
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