Businesses have some pretty treacherous waters to navigate when it comes to regulations and compliance for employees. The initial classification of the worker as an employee or independent contractor is of the utmost importance, as it determines the forms and taxes you need to complete. The misclassification of an employee as an independent contractor could have significant and costly ramifications for your business.
A CPA is an invaluable tool to help you navigate through these choppy waters safely to the other side. The video below From the American Institute of CPAs (AICPA) offers some insight into this complicated issue:
Independent Contractors vs. Employees
Once you have made the determination that an individual is an independent contractor, have the contractor fill out a W-9 Form, which is a Request for Taxpayer Identification Number and Certification, to keep on file in case the IRS has any questions. At the end of the year, if you paid over $600 to a contractor for services, then you must complete a 1099-MISC. Submit one copy of the form to the contractor by the end of January, and one to the IRS by the end of February in order to keep your business on the straight and narrow.
Workers Classified as Employees
On the other hand, an individual is an employee if they perform services for you and you have legal control over what work is done and how it is completed. This holds true even if the employee has freedom to make certain decisions without the approval of an immediate supervisor. You must retain and pay Social Security and Medicare taxes, withhold income taxes, and pay unemployment taxes on all wages paid to employees.
You are required to obtain a W-4 for each employee when they start work to determine their withholding. The employees reporting program within 20 days. Give W-2 forms to all employees by the end of January and to the SSA by the end of February.
You are also required to have workers compensation insurance to protect your business if an employee gets injured on the job. Companies that do not have the proper insurance may be held liable for the employees important to always have adequate coverage since you never know when an accident will happen.
The Consequences of Misclassification
According to the U.S Small Business Association, the misclassification of an individual as an independent contractor can have serious legal consequences. If an individual that you have been treating as an independent contractor is determined to be an employee, you may be required to provide employee benefits, i.e., retirement and health insurance. You may also have to reimburse their wages per the Fair Labor Standards Act and pay back taxes and associated penalties for unemployment, Medicare, Social Security, and state and federal income taxes.
In the video above, CPA Jim Bourke advises you to Forewarned is forearmed, but simply hiring a CPA can help avoid the headaches and costly issues that may arise from hiring and classifying employees.