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Status Quotient

How to determine whether to classify workers as employees or independent contractors.

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This story appears in the May 1997 issue of Business Start-Ups magazine.

The question of whether to classify workers as independent contractors or employees continues to haunt most small-business owners. But entrepreneurs aren't the only ones plagued by this shady issue; because of misclassifications, the IRS loses more than $38 billion in employment taxes each year.

The IRS also says that, besides the employment tax loss, many of these misclassified workers aren't paying income taxes. The agency's statistics show that when the business fails to file with the IRS, less than 30 percent of the workers report their compensation.

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