Who is an employee?

When starting a business, there are many questions you need to ask yourself.  One that you probably haven’t thought about is who is an employee of the business.  It is important to know who the IRS considers an employee because the business needs to pay payroll taxes on all income that individual earns as well as federal and state unemployment tax.  While these may not seem very expensive when the employee only earns minimum wage, however, if you make the mistake of claiming the individual is an independent contractor when the IRS determines he is an employee, not only do you have to pay the back taxes, you will also be required to pay interest and penalties, which can quickly add up.

When determining whether or not a person is an employee or an independent contractor, the IRS looks at financial control, behavioral control, and the relationship between the parties.  When looking at financial control, they will look at whether or not the person had a significant interest in the his work.  For example, if the person was paying his own expenses or has a significant investment in his work, he is likely to be an independent contractor.  When looking at behavioral control, the IRS look at the extent of instructions the person is given to fulfill his job or the training the job provides.  The more instruction or training the company provides, the more likely that the IRS will find the person is an employee.  When looking at the relationship between the parties, the IRS looks at whether or not the business pays the person benefits or whether there is a written contract between the parties stating their intent that the person be treated as either an independent contractor or an employee.

The IRS says that not one of these factors is controlling,  They look at the totality of the facts.  If you still have questions about whether or not the person walking for you is an employee or an independent contractor, you can file Form SS-8 with the IRS requesting that they make a determination whether the person is an employee or an independent contractor.

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