The classification of workers as either employees or independent contractors is one of the most asked questions by small business owners hiring workers. Categorizing employees may seem intuitive, but small-business owners are finding out the reality can be much murkier. This is a hot-button issue with the IRS, so experts from the Pennsylvania Institute of Certified Public Accountants want to shed light on this subject to ensure business owners comply with IRS regulations.
The reason worker classifications have caught the attention of the IRS is simple: employers must withhold income taxes, Social Security and Medicare taxes (with required matching), and pay unemployment tax on wages paid to employees. There is no such requirement for independent contractors. It is up to the family business owner to properly classify workers, so it is critical to know what the IRS looks at when it weighs whether one is an employee or independent contractor.
IRS Form SS-8 was created to assist in determining whether enough control is exercised by the family business owner over the worker to be regarded as an employer/employee relationship. The key word in this situation is “control.” The facts that determine how much control is exerted by one party over the other fall into three categories:
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