Independent Contractor or Employee?

Here is a great link with all the information you need to resolve the contractor/employee relationship status:

http://www.irs.gov/govt/tribes/article/0,,id=134976,00.html

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Here's the recent tip:

Issue Number: IRS Summertime Tax Tip 2010-20
Inside This Issue

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Employee vs. Independent Contractor – Seven Tips for Business Owners

As a small business owner you may hire people as independent contractors or as employees. There are rules that will help you determine how to classify the people you hire. This will affect how much you pay in taxes, whether you need to withhold from your workers paychecks and what tax documents you need to file.

Here are seven things every business owner should know about hiring people as independent contractors versus hiring them as employees.

1. The IRS uses three characteristics to determine the relationship between businesses and workers:

• Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
• Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.
• Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

2. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.

3. If you can direct or control only the result of the work done -- and not the means and methods of accomplishing the result -- then your workers are probably independent contractors.

4. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.

5. Workers can avoid higher tax bills and lost benefits if they know their proper status.

6. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

7. You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS website or by calling the IRS at 800-829-3676 (800-TAX-FORM).

References:

Publication 15-A, Employer's Supplemental Tax Guide
Publication 1779, Independent Contractor or Employee
Publication 1976, Do You Qualify for Relief under Section 530?
Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding

It's important to know that worker classification is a hot topic with state and federal tax agencies. The US Department of Labor is working on regulations on worker classification, and in general the emphasis is on checking to make sure that any worker that is _not_ classified as an employee is correctly classified that way.

The benefits to the worker of being classified as an employee include minimum wage rules, workplace safety rules, possible worker compensation coverage, and inclusion in employee benefit programs such as health insurance and retirement plans. Regulatory agencies are interested in seeing that workers eligible for these benefits do actually receive the benefits.

Businesses paying workers as independent contractors need to be aware of the current status of rules and regulations and make sure that worker status is proper and is properly documented.

Scott

also read this articles on the top of all good advice by the above posts

http://www.ehow.com/how_13664_know-issue-1099.html

We do have some information on this on the newly launched Intuit Guide to Hiring website.

http://www.intuithire.com/read...

This just came in from the IRS:

http://www.youtube.com/watch?v=85dae9YuoJg

 According to the above info, I've been paying an employee mistakenly as a contractor. How do I correct this and how do I change her status for the past few months?