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Employee or Contractor?A big problem facing many small businesses is how to classify workers. Should they be treated as employees or independent contractors?It's a decision that has major tax consequences because employees and independent contractors are treated differently for tax purposes. Business owners must withhold income tax on employees' wages, and must pay Social Security tax (FICA) as well as withhold the employees' portion of the FICA. They also are responsible for unemployment tax (FUTA) and must provide the employee with a Form W-2, "Wage and Tax Statement," showing the amount of wages and taxes withheld for the year.Payments to an independent contractor that total $600 or more for the year must be reported by the business owner on Form 1099-MISC, "Miscellaneous Income," and filed with the IRS. A copy also must be given to the independent contractor.The right to control is a major factor when deciding how to treat workers. "Business owners who set workers' hours, provide them with tools, tell them what to do and how to do it, and can fire them, can usually bet those workers are employees," says the Internal Revenue Service.Improperly classified employees can cause business owners to end up with hefty penalties for nonpayment of employment taxes. Those who need help deciding if their workers are employees or independent contractors ca fill out Form SS-8, "Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding." The IRS will tell them if their workers are employees or not.For more information, consult Publication 15-A, Employer's Supplemental Tax Guide and Publication 505, Tax Withholding and Estimated Tax.
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