Are your workers properly classified as independent contractors? Or are they employees?

With the "tax gap" under scrutiny, Congress wants to learn the answer. Policy makers think misclassification of workers accounts for at least some of the gap, which is the difference between tax dollars the IRS believes are due and what is actually collected.

As attention turns to the issue, you may be wondering about the status of your workers, since the penalties for incorrectly treating an employee as an independent contractor can be severe.

Here's an overview of three categories of indicators that can help you decide.

1. Behavioral control. The more control you have over the work performed, the more likely your workers are employees. Behavioral control includes the right to tell a worker how, when, and where to do the work, even if you don't exercise that right.

2. Financial control. Do you pay for tools, equipment, facilities, and business and travel expenses? That can indicate an employer/employee relationship. Independent contractors typically take on a certain amount of financial risk.

3. Type of relationship. Independent contractors usually provide the same or similar services to others and receive no employee-type benefits from you, such as paid vacation or sick days.

The categories are based on a list of factors the IRS uses as guidelines, but the final decision requires an objective facts-and-circumstances analysis of each situation. What matters is the substance of the relationship your business has with your workers. For help making the determination, please give us a call.

Contact Jim Komos of Ciuni & Panichi at 216.831.7171 or jkomos@cp-advisors.com if you would like additional information on taxes and your business.

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