NEW VENTURE GUIDE
by the UALR Arkansas Small Business Development Center
Employee Or Independent Contractor??
Many businesses assume they can reduce their expense and paperwork burden by arbitrarily "classifying" their workers as independent contractors. If a business employs someone, the business owner has certain payroll responsibilities. He has to:
1). Withhold estimated income taxes of the employee from his paycheck.
2). Withhold social security (F.I.C.A.) taxes and Medicare contributions.
3). Pay the employer share of FICA and Medicare.
4). Provide an accounting to that employee of these deductions each year, ( W-2 form).
AND
He may have to pay unemployment taxes.
The penalties for failing to make these payments and withholdings can be as much as 100% of the tax not withheld or paid. All of these are requirements of the government if the workers are classified as employees. If those workers are classified as independent contractors, these responsibilities are eliminated or are shifted from the employer to the worker.
Unfortunately, many employers find out, after the fact, that the Internal Revenue Service has very strict guidelines as to who can be classified as independent contractors. The 20 classification factors relate to various aspects of the relationship between the business and the worker, specific responsibilities of the worker, and the way the worker conducts, or is expected to conduct, his assignments. These 20 factors are listed in detail in IRS Publication 15-A, available from the IRS. The publication also gives various examples of types of employer--employee/independent contractor relationships.
The pertinent portions of IRS Publication 15-A are included in our online BizFacts service. Request document number 2004.
