SOURCE: National Association for the Self-Employed (NASE)

National Association for the Self-Employed (NASE)

February 26, 2009 00:00 ET

Small Business Worker Classification: Independent Contractor or Employee?

IRS Sets Important Distinctions Come Tax Time

WASHINGTON, DC--(Marketwire - February 26, 2009) - The federal government reports that 70-80% of all new jobs are created by small businesses -- congratulations to the nation's self-employed for being major contributors to the economy! The question is, by hiring additional workers, are micro-businesses (those with 10 or fewer employees) actually creating more paperwork for themselves?

As a firm grows, many business owners decide to begin using other workers to help manage the needs of new and existing clients. At that point, the business owner must determine the tax classification for the new position he or she just created. Many small businesses think that this distinction is a matter of choice. Not so, says the Internal Revenue Service (IRS).

It is extremely important to know the classification of your workers and to make sure you pay them correctly and then report those payments correctly to the IRS at the end of the year. The IRS actually uses a multi-step checklist to evaluate whether a person is an employee or an independent contractor. If you are unsure whether to classify your newest worker as an employee or an independent contractor, here is a quick way to sort them out:

--  If you control the Who, Where, When and How the work is done, then
    they are probably an employee. This means that you, as the business owner,
    must file a Form W2, withhold income and payroll tax, and potentially
    contribute to their retirement plans.
    
--  If the worker controls their own work product and even has other
    customers besides you, then they are most likely independent contractors.
    They are responsible for their own forms, including Schedule C, Profit or
    Loss from Business; Schedule SE, Self Employment Tax and Form SS-4,
    Application for Employer Identification Number.
    

This is certainly a complicated issue and a very important one as small businesses continue to create jobs. For more details on how to classify a worker, visit the IRS online [www.IRS.gov] where you can download Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

The National Association for the Self-Employed (NASE) also offers free micro-business tax advice from certified public accountants through TaxTalk. Submit your question and receive an answer in about two business days at http://tax.NASE.org.

About the NASE

The National Association for the Self-Employed (NASE) is the nation's leading resource for the self-employed and micro-businesses, bringing a broad range of benefits to help entrepreneurs succeed and to drive the continued growth of this vital segment of the American economy. The NASE is a 501(c) (6) non-profit organization and provides big-business advantages to hundreds of thousands of micro-businesses across the United States. For more information, visit the association's web site at www.NASE.org.

Contact Information

  • Contact:
    Kristin Oberlander
    (202) 466-2100
    Email Contact
    Twitter: koberlander