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15760 Ventura Blvd, Suite 610 Encino, CA 91436
FREE CONSULTATION818-436-2775
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Personal, Affordable Payroll Services, Bookkeeping, and Tax Processing for Small Business throughout Los Angeles County.

What You Need to Know About Classifying Your Employees

Are you sure you’re correctly classifying your employees?

Understanding tax laws that impact your business is a critical aspect of small business management. Included in this is understanding the difference between employees and independent contractors.

Misclassifying your employees can have serious ramifications, so be sure to read on to learn what you need to know about classifying your employees.

The Difference Between Employees & Independent Contractors

Small business management extends beyond simply supervising your employees — it’s also necessary to understand business and tax laws that impact your company.

Employee classification is an area of confusion for many business owners, particularly when it comes to determining the difference between an employee and an independent contractor.

From the employer’s perspective, the primary difference is that employers withhold income taxes, unemployment tax, and Social Security and Medicare payments from an employee’s paycheck. Employers typically also provide benefits such as health insurance, 401(k) matching, and more to full-time employees — none of which applies to independent contractors.

But how do you know how you should classify your workers?

Independent Contractors

Independent contractors are self-employed. According to the IRS, individuals are independent contractors “if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” This means that if you do not have control over how services are performed, the individual is an independent contractor.

California employers can also refer to the ABC test established by Assembly Bill 5 to help employers differentiate between employees and independent contractors.

According to the ABC test, individuals should be classified as independent contractors if they:

  • are free from the hiring company’s control and direction as it relates to the performance of services.
  • offer services that are outside of the company’s typical course of business.
  • are regularly engaged in an independently-established trade, occupation, or business.

Employees

Per the IRS, an individual is an employee if you control what work is done and how the job is done. If you have the right to control the details of how the services are performed, the worker is considered an employee.

In this case, you are responsible for the necessary employment taxes.

Employee Misclassification

Employee classification is particularly important for tax purposes. Employers are responsible for employment taxes for each of their employees. This is not the case for self-employed individuals as independent contractors have to pay a separate self-employment tax.

If you misclassify an individual as an independent contractor, you may be responsible for that worker’s employment taxes.

Moreover, as independent contractors aren’t entitled to a minimum wage, paid holidays, or other employee benefits, misclassified workers may take legal action to seek damages due to make up for lost wages.

To avoid these consequences, it’s important to carefully review the difference between independent contractors and employees and carefully apply this information to your business.

Contact ATPP

Small business management requires a lot of time and attention, and topics such as employee classification are often put on the back burner to deal with more pertinent issues.

Employee misclassification can have serious financial consequences, making it important to work with a professional who understands this complicated tax topic.

At ATPP, we focus on providing small businesses in Los Angeles County with affordable, industry-leading accounting, and payroll services.

If you need help accurately classifying your employees for tax purposes, contact ATPP today to learn more about our professional services.