Most entrepreneurs understand the complexities of running a company. They have to balance expenses, manage employees, craft products and establish a strong customer base. Along with that, they need to make sure all the details are perfectly executed.
One detail that some employers miss is employee classification on taxes. It’s a small detail that leads to significant consequences from the IRS and the Department of Labor. Luckily, there are ways to ensure your staff members are employees or independent contractors.
The identification of contractors
According to the IRS, an employee is anyone who performs services for your company where “you control what will be done and how it will be done.” Common examples include retail workers, administrative potions and other full-time jobs.
However, an independent contractor works for the same employer, but managers cannot dictate how the work will be done. They can only control the result of the work. Typical contracting roles include Uber drivers, construction workers and freelance writers.
The distinction from a contractor to an employee is slightly different from company to company. But if you are ever in doubt, ask: does the company control how a person performs their job, do the company pay for their income or expenses and is there any employee benefits?
The mistake of misclassification
It’s crucial to understand the distinction between contractor and employee because independent contractors are considered “self-employed,” so they follow different tax protocol. Also, the employer does not pay employment takes for contractors.
If you try to misclassify an employee as a contractor, the IRS asks the employee to file a complaint with the U.S. Department of Labor or the California Department of Labor. The IRS may follow through on an investigation and possibly charge the owner with tax fraud.
It’s critical to avoid mistakes, especially when it comes to taxes. The ramifications are detrimental to the company’s finances and your reputation. Make sure to prevent misclassifications by consulting with a tax expert in California before filing anything.