Do I have employees or independent contractors?

Do the people who work for you come into the office for regularly scheduled hours and work on whatever there is to do that day? Do they usually work from home on specific projects, setting their own schedules and using their own equipment? Or, is it some combination of the two?

Although it may not matter much to you how your workers get things done, it can make a big difference for your business. If someone who works for you is an employee, you are responsible for paying state and federal unemployment, disability, and social security taxes. On the other hand, these requirements do not exist for independent contractors.

Although it may be tempting to classify a worker as an independent contractor because of the tax savings, you should be careful in making this designation. If you wrongly classify someone as an independent contractor, you may be required to pay past taxes and a steep penalty to the I.R.S.

If you have any doubt about whether someone working for you is an independent contractor or an employee, you should seek the advice of an employment attorney. The I.R.S. uses a complicated test that looks at many different factors to make this decision, and an attorney can help you evaluate the factors and make the right decision for your business and its tax liability.

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