Are you aware of the specific legal and financial differences between employees and independent contractors? Business owners must make sure to differentiate and treat professionals according to their classifications when considering pay or other compensation. Here’s what they need to know:
If a business controls the activities and method a worker uses to complete work, that person is typically considered an employee. Whereas independent contractors usually operate in independent trades or businesses and offer their services to the public (think plumbers or freelance writers). In other words, employees work for businesses, which control their work performance and processes, whereas independent contractors often have more freedom with regards to how and when their work is completed.
The IRS has published Tax Tip: 2022-117 to provide taxpayers with information to consider when classifying employees. If brief, they recommend considering the following factors:
Who Has Behavioral Control? Evaluate whether the company receiving services has the ability to control the work performed and the manner in which it is completed.
Who Has Financial Control? Consider whether the company controls the worker’s business and/or financial details, such as payment and expense reimbursement.
What is the Relationship Between the Parties? Employees often sign contracts that include defined benefits like paid time off, 401k or retirement contribution, insurance, etc. Understanding of the relationship between the parties is key.
Ensuring correct employee classification is important because businesses can be held liable for employment taxes. To learn more about worker classifications, read the full Tax Tip: 2022-117 and contact your HW&Co. advisor with any questions.