Employee vs Independent Contractor - Tax Tip of the Week

What every employer and potential worker needs to know about the Employee vs. Independent Contractor relationship.Employers will be biased to treat a worker as an Independent Contractor as a means to avoid payroll taxes (FICA, Medicare, Workers Compensation, Unemployment Taxes, etc.).  As an Independent Contractor, the employer can also exclude them from health care and retirement plan benefits.As a potential worker, you may agree to accept a position as an Independent Contractor but be aware that you will be subject to Self-Employment Taxes (SE Tax).  The SE tax rate is 15.3% in addition to your regular income tax obligations.  Also, you may not be eligible for Workers Compensation benefits if you are an Independent Contractor and get hurt on a job.Lately, the IRS has been very aggressive in reclassifying Independent Contractors to Employees based on the following facts and circumstances:Three characteristics are used by the IRS to determine the relationship between the employer and worker:  Behavioral Control, Financial Control, and the Type of Relationship:

1. Behavioral Control covers whether the business has a right to direct or control how the work is done trough instructions, training or other means.
2. Financial Control covers whether the business has a right to direct or control the financial and business aspects of the worker’s job.
3. The Type of Relationship factor relates to how the worker and the business owner perceive their relationship.

If the employer has the right to control or direct not only what is to be done, but also how it is to done, then it is probably and Employee relationship.If the employer can direct or control only the result of the work done—and not the means and methods of accomplishing the result—then you most likely have an Independent Contractor relationship.Employers who misclassify workers as Independent Contractors can end up facing substantial tax bills and penalties.  Workers can avoid higher tax bills and lost benefits if they know their proper status.Give us a call if you have any questions on this important issue.Call us with any questions. In Dayton, call 937-436-3133 and in Xenia, call 937-372-3504. Or visit http://www.bradstreetcpas.com....until next week.