INDEPENDENT CONTRACTOR VS. EMPLOYEE
Currently, the likelihood of your business being involved in a worker classification or employment tax audit is increased because the IRS is aggressively attempting to reduce the "tax gap".
As a result of the Questionable Employment Tax Practice (QETP) initiative, the IRS entered into agreements with workforce agencies in 29 states to share results of employment tax examinations. These agreements provide a centralized, uniform means for the IRS and state employment officials to encourage compliance with federal and state employment tax requirements.
The lack of a single, definitive test for classifying workers as either employees or independent contractors contributes significantly to the worker classification problem. Therefore, understanding the difference between an employee and an independent contractor is very important. If you are an employer, you are required to withhold and contribute a matching amount of FICA and Medicare taxes from your employee's income. However, if your workers are independent contractors, you are only required to report payments of $600 or more on a Form 1099-MISC (Miscellaneous Income). Failing to make the right classification could cost you money.
If you have workers who make substantial financial investments in tools, equipment, or a place to work, or undertake some entrepreneurial risks, they are probably independent contractors. However, when you control and direct the workers who perform services for you as to the end result and how it will be accomplished, you are probably involved in an employer-employee relationship.
Unless there is a reasonable basis for treating your employees as independent contractors, failing to withhold income and employment taxes from their wages can result in severe penalties and interest, in addition to the back taxes owed.
You may want to verify that your workers are properly classified and that your employment tax records are in compliance with IRS guidelines, especially in the event of an audit.