How does an employer correctly classify workers?

On Behalf of | Jan 14, 2020 | Tax Issues

Classifying your workers correctly is essential because of taxes. If you choose the wrong classification, it can have serious financial repercussions on your Pennsylvania business. You have two general options: employee or independent contractor. The IRS has specific rules for what workers qualify for each classification because for employees you have a tax liability but your independent contractors you do not. 

There are several rules that can help you to determine how to properly classify your workers. The general idea is to consider the relationship you have with the worker. In most cases, if you require the worker to follow a set schedule and control all the aspects of the person’s work environment, then the worker is an employee. If the worker has freedom to decide his or her own schedule and manages his or her own work, then that worker is likely an independent contractor. However, these are very simplified examples. 

You may also have an employee if you provide benefits and you provide all the equipment and tools for the job. An independent contractor is more likely not to have any benefits and have to supply his or her own tools and equipment for the job. 

You also must look at the control you have over the worker. If you have complete control over the work he or she does, then it is likely an employee scenario. With an independent contractor, you may have some control, such as setting guidelines for how to do the work or requirements the finished product must meet, but in general, you do not control how the employee reaches the end result. 

Deciding the category of a worker is often complex and confusing. However, you must make sure to do it correctly because you must pay employment taxes for employees and not doing so equals a huge tax penalty. This information is for education and is not legal advice. 

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