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Why is worker classification important to taxes?

On Behalf of | Dec 15, 2021 | Uncategorized |

Worker classification means determining whether a worker is an employee or an independent contractor. There are some hard rules for making this determination. It is not a random choice or option you have as an employer.

One of the most important reasons for ensuring your worker classifications are correct is that the wrong decision will have a profound impact on your taxes. The IRS explains you could face serious penalties if you wrongly classify a worker.

The difference

The reason worker classification impacts taxes is that as the employer you only pay the employer portion of payroll taxes for employees. Independent contractors have the responsibility to pay that portion for themselves through self-employment tax.

The issue

Many employers try to classify workers as independent contractors in an attempt to avoid having to pay taxes. For this reason, there are distinct tests that allow the IRS to know if a worker is an independent contractor or an employee.

You cannot pick and choose how you will classify workers. If you say they are independent contractors, you must treat them that way. Otherwise, they are employees.

The classification

In general, you should assume your workers are employees. As long as you tell them when and where to work and control how they work, the workers are employees. If you give them freedom and do not directly control how, when and where they work, they may be an independent contractor.

You should use the tools provided by the IRS to verify worker classification. This will help you to avoid any issues when tax time rolls around.