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Classifying Independent Contractors

Avoid independent-contractor snags.

This story appears in the February 2005 issue of Entrepreneur. Subscribe »

Don't get caught by the IRS for improperly classifying workers. The IRS scrutinizes this information, trying to find entrepreneurs who may misclassify workers as independent contractors instead of employees. "It's an important issue for the IRS because worker misclassification may give a competitive advantage to the business using independent contractors," says Don Segal, the acting employment tax policy program manager for the IRS.

It's easier for the IRS to collect taxes from business owners than from independent contractors. Employers must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes on wages paid to employees.

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