Is your worker a 1099 contractor or a W2 employee?

EMPLOYEE /OR/ CONTRACTOR? THE CRACKDOWN ON MISCLASSIFIED WORKERS For small-business owners hiring both independent contractors and employees, it's important to fully understand the distinctions between the two to avoid complications from the Internal Revenue Service (IRS). With everyone looking to cut costs and the IRS conducting payroll audits on worker misclassification, we take take a close look at the difference between full-time staff and contractors. According to the IIRS, “In general, someone who performs services for you is your employee if you can control what will be done and how it will be done." KNOW THE DIFFERENCE Some businesses misclassify an estimated 10% to 60% of their workers as independent contractors. W-2 EMPLOYEE 1099 CONTRACTOR Performs duties dictated or controlled Has own tools and sets own hours by others Is provided training for work to be accomplished Invoices for work completed Works for one employer Can work for multiple companies Is on the company's payroll and receives a W-2 form at tax time. Employer Pays own taxes to IRS and state tax department. Receives 1099-MISC at tax time. withholds federal and state taxes, Social Generally, companies do not withhold or pay Security and Medicare federal taxes on behalf of contractors Is typically offered benefits, such as paid sick leave, vacation, health insurance, 401K or other retirement plans Not entitled to company benefits CONTRACTORS CAN SAVE EMPLOYERS AS MUCH AS 40% ON $ $ $ $ LABOR COSTS, WHILE HIRING AN EMPLOYEE WILL GIVE THE COMPANY A LONG-TERM INVESTMENT BECAUSE OF THEIR $ $ $ $ $ STRONG LOYALTY AND KNOWLEDGE OF THE BUSINESS. THE CONSEQUENCES MAJOR CRACKDOWN Nearly 30% of firms misclassify contractors. An additional $900 MILLION per year would go towards the IRS, if the tax agency were to modify its "safe harbor" rules, making it This amount equals to billions of dollars in unpaid difficult for employers to taxes, and the IRS is working hard to intervene. classify workers as independent contractors. MISCLASSIFYING YOUR WORKERS MAY RESULT IN: • Owing back payroll taxes, interest, and stiff penalties. amount of paperwork. • Accruing a large $9.5 MILLION $8.71 BILLION 1,000 The amount the government has The number of estimated tax The number of small businesses collected in back wages from more revenue over the next 10 years from the U.S. treasury forcing employers to rightfully classify workers that have signed up for an extended amnesty program that waives some penalties to encourage employers to voluntarily reclassify contractors as employees than 11,400 misclassified workers since September 2011 MAKE THE ASSESSMENT If you find that you need to reclassify your contractors or bring them onto payroll, but be sure to consult a tax expert or legal counsel before you take action. EXAMINE EMPLOYEE'S STATUS If you discover a contractor misclassification, Voluntary Classification Settlement programs can help fix issues regarding federal, not state, taxes. Take heed: You may owe contractors benefits and other compensation for the period during which they were misclassified. STAY WITHIN YOUR MEANS By adding contractors to your payroll, make sure you can afford it. Adding employees to the payroll will cost the business additional employment taxes. Make sure you properly classify contractors to avoid any conflicts with the IRS. %$4 HELP FROM IRS The IRS can help an employer determine a worker's status. An employer must file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. SOURCES: INTUIT. IRS.gov, U.S. Small Business Administration, Wall Street Journal %24