As a business owner, you may have to decide whether to hire independent contractors or regular employees for various positions. Both practices have their advantages and disadvantages, and are subject to very different rules when it comes to taxes.

Although you do not usually have to withhold or pay any partial taxes for independent contractors you hire, you do have to withhold income taxes, withhold and pay Medicare and Social Security taxes and pay unemployment taxes on wages for regular employees. With that in mind, it’s important to determine from the outset which category the individuals you’ve brought on are going to fall into to avoid tax issues later on.

The following information should help you determine the employment status of the people working for you:

Do you control their work?

Generally, if you have the right to direct and control when, where and how your workers go about or produce their work, no matter how much leeway you may allow them, they are considered employees. If the Internal Revenue Services tries to determine whether your workers are employees or independent contractors, the agency will examine the following specific categories of your control over them:

  • Behavioral control: This covers whether you have the right to direct how your workers perform their jobs, to control the times and locations they do it and to specify the protocol they are to follow through instructions or training.
  • Financial control: This category includes whatever control you may have over all of the business aspects of your workers’ performance, such as how and when they are paid, whether their expenses are reimbursed, who furnishes the necessary tools and supplies and what their profit, loss or investment opportunities are.
  • Type of relationship: This area takes into account how both you and your workers regard your relationship, examining the contracts or intents of both parties, the policy for termination or discharge, worker benefits (like vacation pay or insurance) and the intended continuance of the work.

Although these factors may vary depending on the business, it’s important to both consider and document all of these scenarios to make an accurate determination. If you’ve examined the evidence and are still unsure, you or your worker can file a worker status determination form with the IRS to obtain an official decision. For further guidance on this issue, consult an attorney experienced in labor law.

BoltNagi is a widely respected and well-established employment law firm serving businesses and organizations throughout the U.S. Virgin Islands.