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Independent Contractors and Employees

There are certain financial and tax advantages that arise from having workers classified as independent contractors instead of employees. For example, a business with employees must pay payroll taxes, keep employee records, and file payroll tax forms for its employees. A business need not perform these tasks for its workers who are independent contractors.

The IRS pays careful attention to the classification of workers in a business. Generally, if the business owner or manager instructs its workers when, where, and how to do their jobs, the business owner is treating these workers as employees. Business owners or managers may treat workers as independent contractors only if the workers have their own businesses and offer their services to several contractors. If a business owner or manager is unsure of the status of its workers, it is best to treat them as employees.

It may be tempting to classify workers as independent contractors. Owners might even save money in the short run. However, doing so may get them into big trouble in an IRS audit. The IRS may decide that their “independent contractors” really are employees. This could result in their having to pay an assessment of back taxes, penalties, and interest.

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