If you’re employing both independent contractors and employees, you’ll want to know the difference between both in order to distribute tax information correctly, as well as how to prevent future IRS issues with how you handle your forms. When businesses don’t classify their employees correctly, they pay dearly (think Uber in 2016, who had to give an over $100 million payment to drivers they had misclassified as independent contractors instead of employees).
While larger corporations might be more to blame for having misclassified as a means to save money, much smaller businesses might make a mistake in classifying simply by not understanding the rules.
Understanding the difference between independent contractors and employees
The same way that independent contractors might invest more of their time and energy into the resources they use to do the work as well as the standards of their employee (for example, when and where they work), they also invest more energy into completing their tax forms since they pay a self-employment tax.
The IRS recommends that companies base their employee on three broad standards: the schedule, behavioral control, financial control, and more the type of relationship, then they will probably want to use the employee classification. Employees are then entitled to severance, workers’ compensation, and other protective measures, and have payroll taxes.
One of the most important distinctions in classifications is the length of time an employee works for an employer, versus an independent contractor who might be hired on for one specific project or for a predetermined length of time (or a trial period before becoming a full-time employee, for example).
The IRS once used a 21-question test that can help you to determine whether or not you have hired an employee or contractor. Some experts recommend taking a look at it if you’re still feeling lost.
Once you’ve determined what types of forms you need, it’s time to file. The IRS recommends electronic distribution over paper filing, and e-filing has never been easier. The more forms you have, the cheaper each form will be (eFile360 offers bulk and volume pricing, and if you need paper filing, we do that too).
The penalties are steep for misclassification (there are bigger penalties with misclassified employees as contractors, rather than the reverse). eFile360 can’t provide accounting services, but we can make the filing process easier. When in doubt, ask an accountant for assistance in classifying your employees.