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Small Business Worker Classification: Independent Contractor Or Employee?

Thursday, February 10, 2011

For Immediate Release: Contact:    Kristin Oberlander
(202) 466-2100
koberlander@NASEadmin.org
Twitter: koberlander, NASEtweets

IRS Sets Important Distinctions Come Tax Time

Washington, D.C., February 10, 2011 – The self-employed contribute a mighty portion to the U.S. economy – nearly $1 trillion. There is no question that they are helping create jobs by growing and hiring new workers. The question is, by hiring additional workers, are micro-businesses (those with 10 or fewer employees) actually creating more paperwork for themselves?

“Determining whether a new worker is an employee or an independent contractor can be tough,” says Keith Hall, National Tax Advisor for the National Association for the Self-Employed (NASE). “Keep in mind that you can’t just choose which one is easiest. It really depends on who calls the shots day to day.”

As a firm grows, many business owners decide to begin using other workers to help manage the needs of new and existing clients. At that point, the business owner must determine the tax classification for the new position he or she just created. Many small businesses think that this distinction is a matter of choice. Not so, says the Internal Revenue Service (IRS).

It is extremely important to know the classification of your workers and to make sure you pay them correctly and then report those payments correctly to the IRS at the end of the year. The IRS actually uses a multi-step checklist to evaluate whether a person is an employee or an independent contractor. If you are unsure whether to classify your newest worker as an employee or an independent contractor, here is a quick way to sort them out:

  • If you control the Who, Where, When and How the work is done, then they are probably an employee. This means that you, as the business owner, must file a Form W2, withhold income and payroll tax, and potentially contribute to their retirement plans.
  • If the worker controls their own work product and even has other customers besides you, then they are most likely independent contractors. Payments to independent contractors are reported on IRS Form 1099, and the independent contractors are responsible for their taxes and their own tax forms, including Schedule C, Profit or Loss from Business and Schedule SE, Self Employment Tax.

“It’s very important to get the decision right, because the IRS can certainly come in later and second guess, which could potentially lead to penalties and interest if taxes were underpaid,” adds Hall.

This is certainly a complicated issue and a very important one as small businesses continue to create jobs. For more details on how to classify a worker, visit the IRS online [www.IRS.gov] where you can download Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

The National Association for the Self-Employed (NASE) also offers micro-business tax advice from certified public accountants through TaxTalk. Submit your question and receive an answer from qualified CPAs at the NASE’s Tax Resource Center.



About the NASE
The National Association for the Self-Employed (NASE) is the nation's leading resource for the self-employed and micro-businesses, bringing a broad range of benefits to help entrepreneurs succeed and to drive the continued growth of this vital segment of the American economy. The NASE is a 501(c) (6) nonprofit organization and provides big-business advantages to hundreds of thousands of micro-businesses across the United States. For more information, visit the association's Web site at www.NASE.org.




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