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Corporations Must Properly Classify All Workers to Avoid Penalties


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7/23/2014
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Although it seems simple enough to decide whether or not someone is a regular employee or an independent contractor (IC), especially when the latter always works from a separate office, some businesses are facing serious tax penalties because the IRS has decided that they’ve paid some workers on an improper basis.                                                                                                                                       

The main reason the penalties can run so high is because if you’ve paid someone as an independent contractor for a long period of time (when that person should have been legally classified as an employee), you will have failed to deduct between 20 to 40% of that person’s earnings to cover all required payroll taxes and withholding amounts. So, if the IRS later discovers this error, you must not only pay those amounts owing with interest, you may also have to pay some penalty fees, too.

When trying to decide whether or not you’ve properly hired someone as an employee or independent contractor (IC), make sure you carefully consider each of the following factors.  (Note: Just having someone sign a contract saying s/he is an IC will not necessarily protect you).

Factors Affecting the Proper Classification of an Employee

Are you the sole client? Is the “IC” you’ve hired doing work for other clients and pursuing other business opportunities while handling work for you?

  • Does the worker have a significant amount of money invested in equipment purchased on his/her own to do work for various people? If s/he has bought a great deal of equipment which you have not paid for, there’s a good chance s/he is an IC;

  • Do you regularly hire this person? The IRS will look closely to see if you’ve been routinely hiring someone to handle your bookkeeping or other tasks. This can count against your claim that the person is an IC;

  • Do you require the worker to obtain regular supervision from you or others? An IC usually doesn’t interact in this manner, although you’re obviously always free to let someone go who isn’t meeting all of your needs or requirements;

  • How significant is the work being done? If the person you’re claiming is an IC is handling tasks that can “make or break” your business – or s/he is managing critical activities in your line of business for you, the IRS may consider such a person an employee;

  • What type of training, if any, have you provided to the IC so s/he can do his/her work? If any significant amount of training has been involved, the person may possibly be considered an employee by the IRS;

  • Has the IC incorporated his/her business? If so, this will help support your claim that the person was working for you on an IC basis. In other words, this clearly indicates that you’ve probably been just one of many clients.

It’s always best to speak with your Peachtree City business attorney before definitely assuming that you have properly categorized all of your employees and independent contractors.

To obtain help with handling all of your Georgia business planning needs, please contact the Law Offices of Shane Smith today.  You can schedule your free initial consultation with a knowledgeable Peachtree City estate planning attorney by calling: (770) 487-8999

 



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