If you are a business owner, it’s very important that you learn to tell the difference between an employee and an independent contractor. This will help you avoid problems and ensure that your accounting is clear and precise. Keep reading to learn more about this important topic.
Employees or Independent Contractors?
When it comes to classifying your workers for tax purposes, there are two basic options: employees and independent contractors.
To determine whether a worker is an employee or a contractor, you should consider three main factors:
- Does the business control, or has the right to control, what the worker does and how they do it?
- Does the company control the financial aspects of the worker’s job? (For example, how are they paid, or how are their expenses refunded)
- Are there any written contracts or employee-type benefits such as pension plan and vacation pay?
If you answered these questions with“Yes,” then the worker is an employee. By contrast, if the answer is “No,” then the person is an independent contractor.
What Happens if You Misclassify a Worker?
Misclassifying workers adversely affects workers themselves in the first place. For example, if a worker is classified as an independent worker when they are really employees, this means that the employer isn’t retaining and paying income taxes, as well as Social Security and Medicare taxes.
Also, if a company misclassifies a worker without a reasonable basis, then it might be held liable for employment taxes for that worker.
If you have workers whom you are currently treating as contractors, but would like to reclassify as employees for future tax periods, then the Voluntary Classification Settlement Program (VCSP) may interest you.
If you want to learn more about this program or determine whether your company qualifies to participate in it, contact JT Tax Services for more details.
Contact the Experts at JT Tax Services
Do you need help figuring out how to classify your workers or with any other matter related to taxes? JT Tax Services is here to help! We give you the peace of mind that comes with knowing that you are limiting your liability while staying compliant with all regulations.
We are located in Oxnard, California. Contact us today by email (email@example.com), telephone (805-984-8890), or through our social media accounts on Facebook, Twitter, and LinkedIn to schedule a consultation or to learn more about our services.