Small Business Tax FAQ

I am hiring people to help out with a big job coming up. Are they considered independent contractors or new employees?

If you will be telling your workers where, when, and how to do their jobs, you should treat them as employees, because that is how the IRS will classify them. Generally, you can treat workers as independent contractors only if they have their own businesses and offer their services to several clients -- for example, a specialty sign painter with his own shop or a freelancer who works for many clients. If in doubt, err on the side of treating workers as employees.

While classifying your workers as contractors can save you money in the short run (you don't have to pay the employer's share of payroll taxes or have an accountant keep records and file payroll tax forms), it may get you into big trouble if the IRS later audits you. The IRS may reclassify your "independent contractors" as employees and assess hefty back taxes, penalties, and interest against you.

For more on the difference between independent contractors and employees, see Nolo's article Independent Contractor or Employee: How Government Agencies Make the Call.

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