Let’s be really clear here. The IRS would love for every single one of your workers to be classified as employees. That means you’d have to pay payroll taxes and it means they’ll have to pay Social Security and Medicare tax.
On the other hand, if you’re an employer you can pay a lot less in taxes and benefits if you have independent contractors instead of employees. You also have more benefits that you can take yourself. Yes, that’s right, as you hire employees, you as the owner lose benefits.
The trick is to win the independent contractor agreement. There are two main tests to determine whether you have independent workers or employees.
- The 20 Question test. This test has been around the longest and explores who is in control of the employee, his/her work and environment, training, results, tools and the like. An employee will have little control. An independent contractor has a lot of control.
- The Three Control Test. The IRS attempted to simplify the 20 Questions into three types of controls.
Type of relationship
The IRS has stated that they believe most independent contractors really are employees. In fact, they have a special form they send out to independent contractors asking if they really are contractors, and not really employees.
Protect yourself by making sure you’re following the rules PLUS make sure you have an Independent Contractor Agreement in place.