It has become common for companies in the “gig economy,” like Uber and the now defunct HomeAway, to classify and pay its workers as contract employees rather than traditional employees. The advantages are clear: you don’t have to pay payroll taxes, benefits or workers compensation insurance for contract employees.
But misclassifying employees is becoming an expensive headache for many business owners.
Aside from the labor laws that you may be violating if you incorrectly classify your workers, the IRS is aggressively pursuing companies in order to collect back Social Security and Medicare taxes for misclassified employees. Misclassifications can cost you significant fines and penalties.
The employer portion of the Social Security tax (OASDI) is 6.2% and the Medicare tax is 1.45%. In addition, there is the federal unemployment tax and the state unemployment tax that can be more than 10% depending on your state. Workers compensation insurance also varies from state-to-state.
Classifications are primarily related to the degree of control and independence. The following are some IRS indicators that your worker is, in fact, an employee.
– Are Your Contractors Really Employees? (INC.)
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