Accurately classifying a worker’s status is crucial in determining the taxes to be collected and remitted to the government. If you are an employer who has workers classified as legal employees, you have to deduct an exact amount of taxes from their regular payroll and remit the same to the government. Failure to withhold and remit trust fund taxes can lead to an assessment of the Trust Fund Recovery Penalty.
To avoid payroll taxes, some employers declare their employees as independent contractors; this way, they will not be required to remit payroll taxes. But how can the government know if a worker is an employee or a contractor? Let’s find out.
When A Worker Is An Employee
- You require—or can require—the worker to comply with your instructions about
when, where, and how to work.
- You train the worker to perform services in a particular manner.
- You integrate the worker’s services into your business operations.
- You require the worker to render services personally; the worker can’t hire others to do some of the work.
- You hire, supervise, and pay assistants for the worker.
- Your business has a continuing relationship with the worker or work is performed at frequently recurring intervals.
- You establish set hours of work.
- You require the worker to devote the majority of the workweek to your business.
- You have the worker do the work on your premises.
- You require the worker to do the work in a sequence that you set.
- You require the worker to submit regular oral or written reports.
- You pay the worker by the hour, week, or month unless these are installment payments of a lump sum agreed to for a job.
- You pay the worker’s business or travel expenses.
- You furnish significant tools, equipment, and materials.
- You have the right to discharge the worker at will and the worker has the right to quit at will.
An Employee Is An Independent Contractor If…
- The worker hires, supervises, and pays his or her assistants.
- The worker is free to work when and for whom he or she chooses.
- The worker does the work at his or her own office or shop.
- The worker is paid by the job or receives a straight commission.
- The worker invests in facilities used in performing services, such as renting an office.
- The worker can realize a profit or suffer a loss from his or her services, such as a worker who is responsible for paying salaries to his or her own employees.
- The worker performs services for several businesses at one time— although sometimes a worker can be an employee of several businesses.
- The worker makes his or her services available to the general public.
- The worker can’t be fired so long as he or she meets the contract specifications.
When it comes to worker classification, there are obvious distinctions between an employee and contractor. The IRS assesses their status by taking into consideration the nature and conditions upon which they render their services.