Page 5 - Payroll

If an employer misclassifies an employee as a subcontractor, there are consequences.
If the IRS deems that a worker was indeed an employee, they can recalculate prior
payroll tax returns to determine the amount of payroll taxes that should have been
paid in on behalf of the employee. The employer will be responsible for paying these
taxes, plus penalties and interest, regardless of whether or not the individual had paid
in the taxes as a subcontractor. The Department of Labor may also sanction the
employer for missed overtime or other benefits as required by various state laws.

Below are categories the IRS has provided to help decide on the proper classification:

Behavioral Control

Does the business have the right to direct and control the
work performed? Review the following categories:
Type of instructions given; such as when & where to
work and what tools or services to use or purchase

Degree of instructions given; the more detailed the
instructions, the more likely the individual is to be
classified as an employee
Evaluation systems implemented & a high level of job
training given may point to an employee

Financial Control

Does the business have the right to control the financial
aspects of the job?
Who bears the responsibility for investments in the
equipment and other expenses related to the job?
Is there opportunity for profit or loss on the job for the
worker?
Is the worker free to market the same skills elsewhere
and to set the price for the job being performed?

Relationship

Written contracts will help establish the classification,
although a contract stating someone is a subcontractor is not
in and of itself enough. You should also review:
Is the individual eligible for vacation pay or a pension
plan?

How permanent is the relationship? Is it for a fixed term
from the outset?
Are the services performed key to business operations?

Page 3 WWW.WEBSITEHERE.COM Terri Johnson, CPA