Your Workers - Are They Sub-Contractors or Employees? (Part 1)

Your Workers - Are They Sub-Contractors or Employees?

If you are treating your workers as being self-employed (you do not withhold payroll taxes) and the IRS or Virginia Employment Commission determines that they are actually employees there can be grave consequences. There is no statute of limitations and you can be held liable for payroll taxes, as well as penalties and interest for all prior years.

Before you can know how to treat payments that you make to workers for services, you must first know the business relationship that exists between you and the person per forming the services. The person performing the services may be an in independent contractor or they could be employees.

Independent Contractors: People such as lawyers, contractors, subcontractors, public stenographers, and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case. The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.

Common-Law Employees: Under common-law rules, anyone who performs services for you is your employee if you have the right to control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.

If you have an employer-employee relationship, it makes no difference how it is labeled. The substance of the relationship, not the label, governs the worker’s status. Nor does it matter whether the individual is employed full time or part time. For employment tax purposes, no distinction is made between classes of employees. Superintendents, managers, and other supervisory personnel are all employees. An officer of a corporation is generally an employee; however, an officer who performs no services or only minor services, and neither receives nor is entitled to receive any pay, is not considered an employee. A director of a corporation is not an employee with respect to services performed as a director.

You generally have to withhold and pay income, social security, and Medicare taxes on wages that you pay to common-law employees.

This column is offered as a public service with the understanding that each person's tax situation is different; and that you should consult your CPA before taking any action based upon comments made in this article. Call me and I will be happy to explain my “CPA Quality tax preparation at H&R Block Rates”.  I can be reached at 825-2771.

Continued next week