As the economy continues to recover and employers begin hiring again, it is more important than ever for business owners to make sure they are correctly classifying their employees. There are two common, and often costly, mistakes that we see on a regular basis. The first is paying employees a salary that should be paid hourly (and should be eligible for overtime). The second is classifying employees as contractors rather than W-2 employees. Paying employees as contractors is an easier process since you do not need to calculate taxes (or hire someone to). The employer also pays less in taxes, but if the business owner is found to have misclassified the employees and not paid the appropriate taxes, the results can be devastating to a small business. The business will most likely be assessed penalties and interest on top of the actual taxes owed, and the federal and state agencies will surely take a VERY close look to see if other employees have been misclassified or if other tax issues are present. In many cases that I have witnessed, the business owner didn’t realize they were doing anything wrong and may have even been advised to pay certain employees as contractors. Unfortunately, in most cases it doesn’t matter whether or not you knew you were wrong.
My advice: go directly to the source and check with the IRS if you are considering classifying an employee as a contractor. The following link has some helpful information from the IRS and there is even a form you can submit to the IRS for a determination. This may seem like an extreme step to take but it could save your business.
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