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Tax Tidbit 6/08: 2008 Planning - Independent Contractor vs. Employee
Understanding the difference between an employee
and an independent contractor is very important. If you are an
employer, you are required to withhold and contribute a matching
amount of FICA and Medicare taxes from your employee's income.
However, if your workers are independent contractors, you are
only required to report payments of $600 or more on a Form 1099-MISC
(Miscellaneous Income). Failing to make the right classification
could cost you money.
If you have workers who make substantial financial
investments in tools, equipment, or a place to work, or undertake
some entrepreneurial risks, they are probably independent contractors.
However, when you control and direct the workers who perform
services for you as to the end result and how it will be accomplished,
you are probably involved in an employer-employee relationship.
Unless there is a reasonable basis for treating
your employees as independent contractors, failing to withhold
income and employment taxes from their wages can result in severe
penalties and interest, in addition to the back taxes owed. Of
course, penalties for intentional worker misclassifications are
harsher than they are for inadvertent mistakes. In addition,
the NJ test for classifying independent contractors may be even
more stringent.
Your benefit plan may also be in jeopardy
if any eligible employees have been misclassified as independent
contractors. Since these employees have been excluded from plan
participation, your retirement plan may lose its tax-favored
status. The problem is compounded when excluded employees seek
restitution for lost benefits not only due to their exclusion
from the benefit plan, but also for health coverage and other
employee benefits.
Since the potential liability is considerable,
we feel that it would be beneficial for you to verify that your
workers are properly classified. We would like to discuss other
planning opportunities available to your business, as well as
answer any questions you might have. Please contact our office
at your earliest convenience to make an appointment.
This "tax tidbit" provides readers with
general tax information and is not intended to be applied to your
specific situation without additional details and/or professional
assistance. Feel free to contact our office at (908) 782-7900
for additional information.
Released 6/18/08
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