With the new season arriving, it can be a good time for business owners to take a step back and review the statuses of their workers. This allows them to avoid any misclassification issues. By correctly classifying workers, businesses can preserve tax breaks and avoid significant penalties.
Why Does it Matter?
While many business owners may not see a need to check in with the classification of their workers, it can be very important. Employers are required to withhold taxes for their employees and pay the employer’s share of payroll taxes on their wages. These numbers in addition to the state tax obligations are then reported to the Internal Revenue Service (IRS). Employers may also be responsible for eligible employees’ fringe benefits, such as health insurance and matching 401(k) contributions.
However, employers do not have the same obligations for independent contractors. Employers are not required to withhold or pay taxes on behalf of them. Independent contractors take care of taxes, insurance, and benefits on their own.
How to Avoid Misclassification
It is important to know that if the IRS discovers a misclassification of workers in a business, it can result in the assessment of back taxes as well as interest and penalties. If the misclassification was intentional, an employer may even face criminal sanctions. It is because of this that it is important to avoid these errors. The following are tips to do so:
- Understand tax rules. If employers maintain control (behavioral and financial) over their workers, they are likely to be considered employees. Independent contractors have independence over their work.
- Be specific regarding the services that are to be performed by independent contractors so they are aware of their responsibilities and expectations
- Keep flexible work schedules. By avoiding a regular work schedule for independent contractors, they can set their own hours.
- Maintain separate payment practices. Do not keep independent contractors on a payroll period like employees are. Instead, compensate them on a per-job basis.
- Review work arrangements and request invoices from independent contractors periodically.
- Be careful about providing benefits. Independent contractors do not need to be covered under a health insurance plan that provides benefits that are usually for employees.
Werdann DeVito LLC is an experienced Certified Public Accountant firm serving clients throughout New Jersey with all of their financial needs. If you need quality assistance with accounting, tax, or consulting services, contact Werdann DeVito LLC today.