It's Classified

It's tempting to classify your hired help as independentcontractors to avoid paying employee payroll taxes. But it'salso very dangerous to incorrectly classify them--the IRS will hityou with hefty penalties, and you risk having to pay even more thanyou would have owed with payroll taxes. Bruce Mayberry, CEO ofCapitolTax Relief, a legal service in Woodland Hills, California,counsels small businesses and private citizens on such tax issues.According to Mayberry, the IRS doesn't play around with 941violations, the tax code dealing with employer tax.

To prevent an IRS snafu in the first place, start-ups should bevery clear about who qualifies as an independent contractor and whois an employee. The IRS even provides a form to clarify it for you:Fill out Form SS-8, Determination of Worker Status, tocertify it once and for all. The IRS will send you a letter saying"yea or nay" that you can keep for your records. Samplequestions to ask yourself: Do you and your independent contractorhave a written contract? Does he work in his own office or shop?Does he work for several businesses at one time? If you answer"yes" to these questions, this person is likely anindependent contractor.