Employee vs. Independent Contractor: What Every Business Owner Needs to Know
Correctly classifying workers as either employees or independent contractors is critical for business owners. Misclassification can lead to serious tax consequences, penalties, and legal issues. The IRS provides clear guidelines to help businesses make this determination.
Why Classification Matters
If a worker is classified as an employee, the business must:
Withhold and deposit income taxes, Social Security, and Medicare taxes
Pay the employer’s share of Social Security and Medicare taxes
Pay unemployment tax on wages
If a worker is an independent contractor, the business generally:
Does not withhold or pay employment taxes
Must report payments on Form 1099-NEC
Making the Determination
The IRS uses three broad categories to assess the nature of the working relationship:
Behavioral Control – Do you direct how the work is done?
Financial Control – Do you control aspects like payment methods, reimbursements, or tools?
Type of Relationship – Are there contracts, benefits, or long-term commitments?
There’s no single factor that determines status. You must evaluate the entire relationship and document your reasoning.
Remote Workers
Even if someone works remotely, they may still be considered an employee if you control what they do and how they do it.
Final Thoughts
Correctly classifying workers is more than just a compliance issue—it’s key to protecting your business and your team. Whether you're hiring, contracting, or managing remote staff, understanding IRS guidelines helps you avoid costly mistakes and stay on solid legal ground. GranthamPoole is poised to help you navigate these changes and ensure your workforce practices are aligned with current regulations.
