Small businesses that are tempted to act like solopreneurs while hiring independent contractors to do the work of employees should beware; the Internal Revenue Service (IRS) is on the case.
With the popularity of contract workers, the IRS has become more diligent in seeking out misclassified workers. They’ve discovered that many businesses have them…and that’s bad news for those businesses. If the IRS finds contract workers performing as employees, the employer will be billed for unpaid payroll taxes and incur severe penalties, after which the state will demand past due unemployment insurance contributions.
Employers don’t usually withhold taxes from independent contractors. So contract workers present the IRS with a problem at tax time; it’s a hassle to collect taxes from them. It’s easier to collect withheld taxes from a single employer than from multiple independent contractors. This is why the IRS is adamant about accurate worker classification. Here are three key features that define independent contractors:
- Contractors themselves decide the time and the way they work.
- When you hire an independent contractor, you specify the end result, not the way it will be achieved.
- If you provide a fixed location and tools for the job, and dictate hours, it’s nearly impossible to claim a worker is an independent contractor.
The benefits of outsourcing makes hiring contractors worthwhile; however, be diligent about classifying contractors, or the IRS may come calling.