Are they employees or sub-contractors?  In a previous life I used to help audit this question.  The advantages to an employer for an employee to be a contractor are significant: no matching FICA, no employment forms, no depositing withheld taxes.  These things can take up a tremendous amount of time and resources that many small businesses simply don’t have.  From the employee perspective there is very little value in being a contractor.  You are responsible for your own FICA both your half and your employer’s half.  You also have a requirements to make estimated tax payments once you get to a certain dollar amount or be penalized.  You have NO withholding so you have NO refund at the end of the year.  Most likely you WILL owe taxes come April 15th.

With all the down side why would an employee agree to be a contractor?  It’s simple – no agreement – no job.

But some times there is legitimate reason to be a contractor.  So how do you know?  The IRS has a list of twenty common law factors and if you are still not sure they will do a free audit to help you figure it out.  It’s not as bad as it sounds. The problem comes in if you have some of the common law factors but not all, what do you do?

It’s been my experience that the more control a company exercises over how, when, where, and by whom work is performed, the more likely the workers are employees, not independent contractors.  Another factor that looms large is whether the person performs this work for other people.  For example, do they have a card?  Can I get them to do that for me too?

Why do I mention all this now?

The IRS is going to allow people to reclassify their workers at a reduced penalty/cost.  This is sort of an amnesty program which usually precedes a big audit of everyone who uses contractor workers.   Best to be sure now and fess up rather than wait for the inquisition.

Price of Reclassifying

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