![]() “This way they can negotiate how much they are paying the person with or without the payroll taxes, workers compensation and any benefits.” How to Classify Your Staff: Employee vs. “My suggestion is for businesses to set up paying a worker correctly from the beginning,” says Rosen. ![]() A freelancer can apply for unemployment or get hurt on the job which can lead to authorities investigating them. ![]() “Classifying someone incorrectly, who should have been an employee, can leave to disastrous results as you can owe back taxes, penalties, interest and workers compensation,” says Rosen.īusinesses do not run the risk of getting caught by a chance audit, says Rosen. The Risks of Misclassifying Employees as Freelancers The IRS previously had a 20 common law factors test and tried to simplify it down to three main categories to determine if a freelancers is classified correctly:Įach situation is determine on a case-by-case basis. And the guidelines are different on the federal and each state level, says Rosen. The problem is that determining whether a worker is a freelancer/independent contractor or an employee does not have definitive answers. This has even become more of a target area under the Affordable Care Act and health insurance mandate.” How the IRS Assesses Employee/Freelancer Status “Workers who are misclassified as independent contractors (freelancers) are a prime example of tax target areas by the IRS, State and Departments of Labor. “When your business hires someone to work as a freelancer, you need to make sure they are in fact an independent contractor and that they are not really an employee,” says Rosen. That’s great news for the sole proprietor, but also a reminder to the employer: There are tax implications when hiring freelancers, and it’s something to plan and prepare for before working with your tax adviser.Ĭlassifying what constitutes a freelancer is confusing to many employers, especially those using freelancers for the first time, says Gail Rosen, of Gail Rosen CPA, a certified public accounting firm that provides a full range of tax and accounting services throughout Greater New Jersey and New York. In fact, a 2015 study conducted by independent research firm Edelman Berland and commissioned by the Freelance Union and Upwork indicated nearly 54 million Americans are now doing freelance work. independent contractors) more than ever before. It’s no secret employers are using freelancers (a.k.a.
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