Friday, March 5, 2010

How does an independent contractor differ from an employee?

As April 15th quickly approaches, you or your accountant has probably started preparing your business's taxes. Do you have people that work for you? If you do, they are either employees or independent contractors, but what is the difference?

In an article on, New York CPA Paul Herman describes the differences between an employee and an independent contractor.

-under the direct control of the employer
-supplies, work space, and tools are provided by employer
-rate of pay determined by employer
-may work part-time or full-time with schedule set by employer

Independent Contractor
-not under the control of the employer
-uses own supplies (may be reimbursed for expenses)
-negotiates rate of pay with employer
-works on a project-to-project basis
-usually works for other employers as well

For more classification rules, please visit

After reading some of the differences, do you feel that you may have misclassified some of your employees? If you have, you need to make the appropriate changes before finishing your taxes. If the IRS finds evidence that someone you are calling an independent contractor is actually an employee, the IRS will charge you, the business owner, penalties for reclassifying the employee and back payroll taxes.

In a recent USA Today article, writer Dave Gram reports that claiming an employee as an independent contractor has cost the IRS and state governments billions of dollars in lost revenues. To recoup their losses, the IRS and 37 states are cracking down on this illegal practice. Make sure your employees and independent contractors are classified correctly to avoid audits which can lead to thousands of dollars (or more) in penalties and back taxes.

As an agricultural entrepreneur, do you feel that you may have classified your employees incorrectly? If you have been audited, what was your penalty?

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