Everyone’s favorite federal organization, the IRS, recently released guidelines to help business owners distinguish employees from independent contractors.   The IRS is following up these guidelines with random audits of employee classification.  Sure, classifying an independent contractor can save your business money in taxes, overtime, and workers’ compensation, but if the IRS finds the contractor should actually be an employee, that business will face stiff penalties.  To avoid this costly and all-too-common mistake, remember these tips the IRS wants you to know about classifying employees.

1.  The IRS uses three characteristics to determine the relationship between businesses and workers: behavioral control, financial control, and type of relationship.  All of these factors will affect whether a worker is rightly an employee or an independent contractor.  If a business has behavioral control, it has the right to direct or control how a worker performs the work, via instructions, training, or other methods.  If a business has financial control, it has the right to direct or control the financial and business aspects of the worker’s job.  Finally, the IRS examines the type of relationship, or how a worker and the business owner perceive their relationship.

2.  If you, the business owner, have the right to control or direct the work to be performed and also how the work will be performed, then your workers are most likely employees.

3.  If you, the business owner, can direct or control only the result of the work to be performed—and not how that result will be achieved—then your workers are most likely independent contractors.

4.  If you have misclassified workers as independent contractors, you may face a hefty bill come tax time.  In addition, the IRS can assess penalties for failure to file required tax forms and pay employment taxes.

5.  If any doubt remains whether a worker should be an employee or an independent contractor, both employers and workers can file IRS Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, which lets the IRS make the classification call.