In these difficult economic times, it's easy to fall into the trap of paying workers as independent contractors as opposed to employees to help to ease the cash flow burden. The topic is one that I am asked about in just about every social situation. The majority of the time my answer is, "No, they are NOT an independent contractor." One of the first questions I ask is if this person puts themselves out for hire to anyone else. Do they have a business card, yellow page ad, web site, etc. advertising themselves as an independent contractor? If you can't answer "yes" to this question, it's a strong indication that you have an employee and not an independent contractor.
One of the pitfalls of this shortcut is that the employee realizes when it comes tax time they owe self-employment tax in addition to income tax. Regardless of how strong an employer believes the relationship or friendship is with the person in question, things become sticky.
The
"employee" feels they should not have to carry the burden of the additional tax, and as a result, will inform the Internal Revenue Service, or their respective state agency, that they were indeed an employee under the complete control of the employer. Business owners often kid themselves into thinking this situation would never happen. It can, and it will.
Please see the following links for more information. The article on CFO.com stresses the IRS's current crackdown.
IRS - Employee vs. Independent Contractor
Cracking Down on Independent Contractors - Careers - CFO.com
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