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Home Business Owners Beware of Contractor Status

Small Business Worker Classification: Independent Contractor or Employee?

It is extremely important to know the classification of your workers and to make sure you pay them correctly and then report those payments correctly to the IRS at the end of the year.

The IRS actually uses a multi-step checklist to evaluate whether a person is an employee or an independent contractor. If you are unsure whether to classify your newest worker as an employee or an independent contractor, here is a quick way to sort them out:

•    If you control Who does the work, and Where, When and How the work is done, then they are probably an employee. This means that you, as the business owner, must file a Form W2, withhold income and payroll tax, and potentially contribute to his or her retirement plan.

•    If the worker controls his or her own work product and even has other customers besides you, then he or she is most likely an independent contractor. He or she is responsible for forms, including Schedule C, Profit or Loss from Business; Schedule SE, Self Employment Tax and Form SS-4, Application for Employer Identification Number.

This is certainly a complicated issue and a very important one as small businesses continue to create jobs. For more details on how to classify a worker, visit the IRS online where you can download Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. HBM

For more information visit NASE.org.

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