By Brian E. Ravencraft, CPA, CGMA, Partner at Holbrook & Manter, CPAs
For decades, worker classification has been a controversial topic between the IRS and taxpayers. According to the IRS, millions of workers are misclassified as independent contractors each year. The distinction is important because it determines if an employer must withhold income taxes and pay employer payroll taxes such as social security, Medicare, and unemployment. As the tax laws continue to change, we expect for the problem to continue to grow as businesses look for ways to reduce their tax bills. With an understanding of the worker classification rules, your business can develop policies and procedures to ensure that workers are properly treated as employees or independent contractors.
To determine how to classify a worker, the IRS provides three tests:
- Behavioral Control: A worker is considered to be an employee when the business has the right to direct and control the work performed by the worker.