The IRS 20-Point Checklist: What You Need to Know About Independent Contractors vs. Employees
Whether you`re a small business owner or a freelancer, it`s important to understand the difference between independent contractors and employees. The distinction may seem small, but it can have major implications when it comes to tax responsibilities and legal liabilities.
Luckily, the IRS has developed a 20-point checklist to help businesses determine whether the people they work with should be classified as independent contractors or employees. Let`s take a closer look at what`s on this checklist and what it means for you.
Control
The first three items on the checklist center around control, which refers to how much direction and supervision the business exerts over the work being done. If the business has the right to control both the result and the means of achieving it, the worker is likely an employee. If the worker has more control over their own work, they are likely an independent contractor.
Financial Aspects
The next six items on the checklist focus on the financial aspects of the relationship between the business and worker. These include things like who provides tools and supplies, who pays for expenses, and whether the worker is guaranteed a certain amount of pay.
Type of Relationship
The last 11 items on the checklist are more general and cover factors like the permanency of the relationship between the business and worker, the extent to which the worker`s role is integral to the business, and whether the worker is allowed to work for other businesses.
Why Does This Matter?
The IRS cares about how businesses classify workers because it affects how much they need to pay in taxes, how much they need to contribute to Social Security and Medicare, and whether they need to provide benefits like workers` compensation and unemployment insurance.
Businesses also need to be careful about misclassifying workers, as it can lead to legal liabilities and penalties. If the IRS determines that a worker has been misclassified as an independent contractor when they should have been an employee, the business may be responsible for paying back taxes and other fees.
What Should You Do?
If you`re unsure whether the people you work with should be classified as independent contractors or employees, it`s a good idea to consult with a tax professional or employment lawyer. They can help you navigate the complexities of the IRS checklist and ensure that you`re following all the appropriate regulations.
In any case, it`s important to be clear about the terms of your working relationships with the people you work with. Whether they are employees or independent contractors, everyone involved should understand their responsibilities and rights. By doing so, you can avoid misunderstandings and legal headaches down the line.