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Corporate taxes are due today!Let’s say you used a bunch of independent contractors in 2010. Who can blame you? It’s a smart way for your business to stretch its budget.
Good, dependable contractors can give you high-quality results with low overhead costs: They don’t expect benefits, they don’t cost you payroll taxes, and they often don’t need to use your office or equipment.
But businesses need to be crystal clear on the difference between independent contractors and actual employees. If you mistakenly claim that an employee is an independent contractor, it could lead to fines and penalties from the IRS. And mistakes do happen—it can be trickier than you think to tell employees and contractors apart.
Here’s how to tell the difference between employees and independent contractors:
Employees. In general, employees are workers that a business can hire and fire, and they are bound by the employer’s instructions as far as exactly how to perform a job or task.
Independent Contractors. Self-employed workers, independent contractors agree to perform work for you and are able to choose how to get the job done; they also use their own tools or equipment to complete the work.
Here is how tax obligations for employees differ for those for independent contractors:
For employees. You must withhold Social Security and Medicare taxes from employees’ paychecks, and you must contribute a share of those taxes. Employers also must foot the entire bill for federal unemployment taxes. If your company is situated where there are applicable state and local taxes, you will also have to withhold them from employees’ pay as well.
For independent contractors. Employers generally do not have to withhold Social Security and Medicare taxes (or make contributions to them), and they don’t have to withhold state and local income taxes.
And here is how the paperwork is different:
For employees. It’s your responsibility to have them fill out a W-4 form telling you how much to withhold. And you have to provide a W-2 form annually, summarizing how much you paid the employee and how much tax you withheld.
For independent contractors. You don’t need to provide independent contractors with W-2 forms. But if you pay a contractor at least $600 during a year, you must provide a Form 1099-MISC, which details the amount paid, with both the IRS and the contractor.
In differentiating employees and contractors, the IRS looks at certain factors including whether there is a time clock (that’s for employees) and whether the worker received health insurance or other benefits from the business (again, those goodies are for employees).
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