Is that person working for you an independent contractor or employee? Before you make the wrong classification, visit the Internal Revenue Service website at www.irs.gov and check out the tax tips section.
According to the IRS, the way to determine whether someone is a contractor or employee depends on three factors:
Behavioral control. Does the company control or have the right to control what the worker does and how the worker does the job?
Financial control. Does the business control the financial and business aspects of the worker’s job? Are the business aspects controlled by the payer? Consider how the worker is paid, expenses are reimbursed and who provides tools and supplies.
Relationships of the parties. Are there written contracts or such employee benefits as insurance, pensions or vacation pay? Will the relationship continue? Is the work performed a key aspect of the business?
If someone is an employee, your business must withhold and pay state and federal income taxes, Social Security and Medicare taxes (both employee and employer contributions) as well as unemployment taxes. In Colorado, you also must comply withthe Family Medical Leave and Insurance Program contribution and withholding requirements.
If you don’t withhold the required taxes and make the required contributions on time and the person doing work for you is later determined to be an employee, there could be substantial penalties, interest charges and other consequences.