May 26, 2024

Watch out: If you are just starting your Small Business, things are still shaky. The IRS is watching you more closely. New Small Businesses are the most likely to make mistakes. One of the biggest problems Small Business has with the IRS is misclassifying their workers. If you are found guilty of this, you could face severe penalties.

Which one? Employees or independent contractors? Your business cannot treat employees as independent contractors. Why? Because that would mean you could avoid tax reporting, bookkeeping, and withholding taxes from paychecks. And the IRS does not take that lightly.

Penalties, Fines, & Interest: The penalties imposed for misclassifying workers is severe. You may have to pay up to 35{b930f8fc61da1f29cba34a8cbe30670691f63878f9c98a2d7d5d6527da1fb8f3} of what you paid to the wrongly classified worker, plus interest. That’s on top of the payroll taxes that are still due.

Classifying Workers: Form 22-8 “Determination of Employee Work Status for Purposes of Federal Income Tax Withholding” includes the following for classifying workers.

Common Factors Showing The Worker is an Employee:

-They have set hours of work

-You trained the worker to perform in a particular manner

-The worker has the right to quit at will and you have the right to fire them

-You provide significant tools and equipment for the worker

-The worker’s services are part of your business operations

-Your worker cannot hire others to do their work

Common Factors Showing the Worker is an independent contractor:

-The worker is free to work for anyone they choose.

The worker hires, supervises, and pays for assistants

-The worker can’t be fired as long as they meet the terms in the contract

-The worker works at their own office/shop

-The worker is paid by the job or is paid commission

Priority: The IRS checks the classification of workers very carefully. It is actually a priority if your business is being audited. Take these lessons with you. Make sure to classify your workers correctly if you want to avoid huge IRS debt.

Now You Have The Smoking Gun…Use it!