Are You an Employer? Do You Know?

Do you have employees? Sounds like a simple question. But every day, people get surprised to find out that their independent contractors are actually employees in the eyes of the government. They usually find this out the hard way, when their "contractor" discovers that they don't qualify for the benefits they would get as employees, such as unemployment compensation or disability insurance.

Many business owners have people working for them on a fairly casual basis and pay them as independent contractors. This seems like the simplest solution, but it can backfire under an audit, or if the worker files a claim.

The IRS provides guidance on determining whether your worker is a contractor or an employee guidance. The amount of control you exert over the worker is the main determinant. If you control when and how the person works for you, and provide work space and tools, then that person is generally considered to be an employee. That means you will be withholding payroll taxes and paying the employer's share, and are responsible for submitting that money to the government and filing the appropriate payroll tax returns. Your state law will also have something to say on the matter so be sure to check the appropriate labor and taxing agencies for guidance. You are also responsible for providing worker's compensation insurance.

If your worker is, in fact, an independent contractor, you still need to do some paperwork. You should have a Form W-9 on file (available on the IRS Website) and will need to submit Form 1099 at the end of the year if you paid them $600 or more. Currently, you do not need to report money paid to corporations, but the IRS has their eye on this exception. An effort to change the rules last year was mostly foiled, but that could change in the future.

If it turns out that the government finds that your contractor is really an employee, you will be liable for back taxes as well as penalties, interest and fines, so it pays to check out the rules! What may seem simple at the start of hiring workers could turn into a mess down the road.