The question I get asked most frequently from new clients is "what are the independent contractor rules?" All small business owners like to use independent contractors to save money and avoid the dreaded payroll.
The IRS and state agencies want to ensure that you are not misclassifying employees as independent contractors to get around employment laws and taxes. You must be sure you’re following the rules or you could face stiff penalties. In the event worker’s are reclassified during an employment audit, you could be forced to pay all of the employment taxes owed from prior periods plus penalties and interest. (and yes, they do regularly audit small businesses. I’ve personally handled 2 audits in a two year period for my small client base.)
So, how do you know that you are classifying independent contractors appropriately? Well, it’s not as easy as you would think. The IRS and individual states employ different rules. The general rule for any employment law is you must follow the most conservative law. If the state’s laws are more stringent, you must follow state law…it’s usually the state that further clarifies a federal law.