Employee or Independent Contractor: What the IRS Says About It

by | Apr 1, 2021 | All Up In Yo' Business, Contracts, Running Your Business, Starting a Business, Taxes

We’ve previously discussed how the terms “independent contractor,” “gig worker,” and “freelancer” all mean the same thing: basically, they are all self-employed and not an employee of someone else. It’s important to know the differences between contractors and employees since employees have certain inherent rights that contractors typically do not. On the flip side, employers have certain duties and obligations to their employees that they don’t have to independent contractors.

If you run a business and hire somebody to perform work for your business, you must take care to properly classify them.  Now, misclassifying somebody as an employee when they really might be considered an independent contractor won’t get you into too much trouble. But the other way around — misclassifying an employee as an independent contractor — that’s a big no-no.

Employee or Independent Contractor: Why is it such a big deal?

If you misclassify your employee as an independent contractor, you could be liable to the IRS for employment taxes for that employee. You could also be liable under state and federal labor laws such as the Fair Labor Standards Act. As if that’s not scary enough, you also risk being liable for things you didn’t anticipate such as worker compensation claims or liability for your employee’s actions under the legal doctrine of respondeat superior. Needless to say, it is really important to understand the differences.

What makes it especially difficult is that there’s no bright-line rule for determining whether to classify a worker as an employee or an independent contractor. Each state has its own rules and laws addressing worker classification, the United States Department of Labor has its own rules, and so does the IRS. Check out the video below to learn about how the IRS makes that determination.

Tune in to this week’s episode of All Up In Yo’ Business to learn how to properly classify the individuals that work within your business. And be sure to subscribe to our YouTube channel for more All Up In Yo’ Business! 

Want more information to help with your business? Check out: Does My Business Need An EIN?





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