Need Some Deductions for 2011?

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Updated for 2011

Classifying Workers

Your First Challenge:

Hiring workers has important tax implications. Therefore, compliance with employment tax rules must be taken seriously.

Your first challenge when a hiring a worker it to properly classify the worker as either an employee or independent contractor. Misclassification of workers, intentionally or unintentionally, can result in costly penalties.

If a worker misclassification error is discovered years later by the IRS, the accumulated penalties and interest can be staggering.

The IRS regards a failure to withhold and remit trust fund taxes as serious matter. Consequently, from time to time, the IRS makes an extra effort to crack down on employment tax violators.

Here's a Wall Street Journal article dating back to 2007 dealing with the crack down of employment-tax violations and some key issues, such as whether a worker should be classified as an employee or independent contractor.

How a person is classified is important because it determines:

Your tax payment obligations and
Your tax reporting responsibilities

There are two types of workers:

Employees
Independent contractors

Employee Defined

Generally, employees are defined under:

Common law or under statutes for certain types of activities.

Employees defined under statutes are either:

Statutory employees, or
Statutory nonemployees

What Are Common Law Employees?

Although there are many elements (over 60) that may be used by the IRS to determine whether a person is a common-law employee, a key element is control.

If you hire a worker and have the right to control...

what is done,
when it is done, and
how it is done, (you provide the means and methods for getting the job done)...

that person will generally be classified as an employee.

Examples of items that indicate a worker is an employee:

You, or someone else in your business, provides supervision.
You provide the tools, equipment, and supplies for getting the job done.
You provide a place for workers to perform their assigned tasks.
You determine the work schedule.
A worker does not hold his/her services out to the public (no advertising is done).
The worker does not provide an invoice to the business for services provided.
Workers must sign in and out and are required to adhere to guidelines for taking breaks throughout the workday.
Workers are entitled to paid vacations and sick days.

Not Sure How to Classify Someone?

If you're not sure how someone should be classified, you can have the IRS give you a determination of a worker's status.

Here's how:

Complete Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding for 2011.
Submit Form SS-8 to the IRS to get.

Classifying Workers: What Are Statutory Employees? Withholding Taxes for Statutory Employees; Statutory Employees Have Two Options for Reporting Income

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