Payroll Taxes

How small business owners can avoid misclassifying employees


To start and grow their businesses, small business owners must wear many hats and become pseudo-experts in marketing, sales, accounting, tax planning and human resources matters. Given the varied and complex nature of each one of these business principles, it’s no wonder that many small business owners make mistakes that, if not corrected, can end up costing them dearly.

Earlier this month, the shipping and delivery giant FedEx agreed to settle what’s being called a landmark employment and tax case. At issue was whether FedEx erred when the company classified delivery drivers as independent contractors rather than employees. While the company maintains it committed no labor law violations, its decision to settle the case for $228 million speaks volumes and serves as a wake-up call for all U.S. employers—big and small.

For an employer, classifying a worker as an independent contractor is a much more attractive and much less costly option than to classify a worker as an employee. Employers aren’t required to pay payroll taxes on independent contractors or provide these workers with health, retirement or time-off benefits. Additionally, while employees are protected under federal wage protection and anti-discrimination laws, these protections don’t extend to independent contractors.

While, from a business standpoint, classifying a worker as independent contractors is much more attractive; business owners who misclassify employees will face hefty fines and penalties. So how can a business owner avoid mistakes when choosing how to designate workers? The Internal Revenue Service provides advice on how to determine whether a worker should be treated and designated as an employee or independent contractor.

New York City Business owners who have questions or concerns about employment designations and payroll taxes would be wise to seek the advice and assistance of an attorney who handles tax issues. An attorney can help ensure that a business and business owner are compliant with applicable state and federal employment and tax laws and help rectify outstanding legal problems related thereto.

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