Resources:
Tax Education: Business
Tax
Employee
Versus Independent Contractor Status
When
the IRS audits a business certain issues are of a special
concern to it.
Whether
all the revenues have been reported is always a point of focus.
The IRS has access to bank accounts, so deposited
revenues are easy to find.
A personal lifestyle in excess of reported income is a
tip off.
Personal
living expenses deducted as business expenses are a perennial
problem for the IRS. Entertainment
and auto expenses are particularly subject to review.
The rules are manifold.
Payroll
taxes are a big potential tax liability for business owners and
operators. That
topic is covered elsewhere in this website.
Another
major issue for business owners is the distinction between
employees and independent contractors.
An employee is defined by law.
The classification used by the employer is not binding on
the IRS. The tax liability for incorrectly classifying an
employee as an independent contract can easily reach 50% of the
employee’s annual salary, so making the correct classification
is important. The
problem is that there is no simple workable test or definition.
For
a starting point of the IRS’s view on what constitutes and
employee versus and independent contractor, look at IRS Form
SS-8, Determination of Employee Work Status for Purposes of
Federal Employment Taxes and Income Tax Withholding.
In
a nutshell, the IRS uses the following factors to determine that
the worker is an employee:
1.
You train the worker.
2.
The worker works at your business.
3.
The worker cannot delegate his or her duties to another
person.
4.
The worker cannot hire or supervise assistants.
5.
The worker must comply with your instructions.
6.
The worker has a continuing relationship with your
business.
7.
The worker has an establish set of hours working for you.
8.
The majority of the worker’s work time is spent working
for you.
9.
You control how the work is performed.
10.
The worker must submit regular written or verbal reports.
11.
The worker is paid by the hour, week, or month.
12.
You pay the worker’s traveling expenses.
13.
You furnish most of the tools, equipment or materials.
14.
The worker can be fired at will or quit at will.
The
following factors are used by businesses to show they have hired
independent contractors:
1.
The worker hires, trains, and pays their own assistants.
2.
The worker is free to work for other businesses.
3.
The worker does not work onsite at your business.
4.
The worker is paid by the job or receives a commission.
5.
The worker can realize a profit or loss.
6.
The worker has the worker’s own office, tools, and
equipment.
7.
The worker has several clients and the worker’s
services are available to the public.
8.
The worker cannot be fired as long as the work is
performed correctly.
For more
information contact us at taxhelp@taxdefendant.com
or
Toll Free 866-216-1930
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