Taxpayers Guide to LLCs and S Corps
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Employee or Independent Contractor
Business owners and individuals continue to struggle with employee versus independent contractor status. While the distinctions can be subtle the tax consequence can be severe. Businesses that misclassify an employee as an independent contractor can face stiff tax penalties for not withholding the correct taxes.
On the contrary, independent contractors are personally responsible for self-employment taxes (15.3%) whereas employees only pay half this amount. So, there’s money to be had, and each side has a stake in the classification. Business owners want to save 7.65% by suggesting everyone is an independent contractor. Business owners also want to avoid unemployment taxes and other expenses for carrying a worker as an employee.
Conversely, every independent contractor wants to save 7.65% by being classified as an employee.
Because of this inherent struggle, the IRS continues to see the misclassification of a worker’s status and typically the error is on the side of labeling a worker an independent contractor when in fact he or she is an employee.
We invite you to keep reading these KB articles on independent contractors versus employees.