Individuals and businesses tend to cringe when they hear the acronym IRS, but companies should know that the Internal Revenue Service can be used as a resource to aid in hiring decisions.  The IRS’ website (www.irs.gov) provides answers to many basic questions from determining the classification of individual to be hired to understanding the required tax and benefit implications.

When a business is considering hiring workers, it is important that they first determine whether they should hire an employee or an independent contractor.  The basic distinction between the two types of workers is that any employer must withhold Federal Income Taxes, Social Security, Medicare and Federal Unemployment Taxes from an employee’s paycheck.  In addition, an employer is required to pay the company’s portion of the taxes identified.  When hiring an independent contractor, an employer is not required to withhold these taxes from the worker’s pay, nor must they pay their portion of the taxes.  It is incumbent on the independent contractor to report all earnings and pay the required percentage of taxes directly to the IRS.  The general rule that a business can follow to determine the appropriate hiring classification concerns the amount of control an employer has over the performance of the services.  A worker is classified as an employee when the employer can control what and how the services are performed, including employees who have been provided with freedom of action.  On the other hand, a worker is classified as an independent contractor when the employer is allowed to control or direct the result of the service rather than the process by which it is accomplished. Workers such as lawyers, contractors and subcontractors, etc., acting independently and offering their services to the public are generally not considered employees.

Employers must review all of the facts in each situation to determine proper classification.  It is important to classify individuals properly and to adhere to all IRS guidelines governing this process.  Failing to do so can result in the company being subject to back-taxes and substantial penalties.  The taxes and penalties are levied even though the classification may have been applied unintentionally.  The IRS website provides references to assist a business in making this critical decision.  If a business is still undecided or questions remain unanswered, employers can submit Form SS-8 “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding”.  The IRS will review the completed data and determine what classification the individual meets.  To ensure clearer understanding of the guidelines, numerous publications are available on the IRS website.  Some of these include: Publication 15 Circular E, Employer’s Tax Guide; Publication 15-A, The Employer’s Supplemental Tax Guide; Publication 15-B, Employer’s Tax Guide to Fringe Benefits; Publication 51 Circular A, Agricultural Employer’s Tax Guide; Publication 553, Highlights of 2007 Tax Changes; Publication 926, Household Employer’s Tax Guide; Publication 1586, Reasonable Cause Regulations and Requirement for Missing and Incorrect Name/TINs; and Publication 1976 Section 530, Employment Tax Relief Requirements.

The IRS website also provides tax information necessary for employers when hiring employees.  Topics covered include: an Employer Identification Number (EIN), hiring employees, employment taxes, record keeping and outsourcing payroll duties.  Other information of special interest to employers is benefits paid on behalf of an employee such as unemployment insurance, workers’ compensation and health plans.  The IRS includes data helpful for unique circumstances such as Non-Profits and tax-exempt organizations.  Some of these resources include the definition of employment taxes, classifying a worker as an employee versus an independent contractor, payment options and electronic filing services for employment tax returns, the timing for filing federal tax deposits and basic requirements for reporting compliance of taxes and wages, as well as provisions of key tax forms, publications and resources for tax-exempt organizations (EO).  They have even incorporated guidelines for Employee Tool and Equipment Plans for those employees who are required to provide their own equipment or tools as used in auto dealerships and repair facilities.  A special IRS compliance team investigates all key issues concerning Employee Tool and Equipment Plans claiming to receive tax-favored treatment as “accountable plans”; these accountable plans are based on Internal Revenue Code 62(c) and its pertinent regulations.

The IRS website provides information about workers employed on a smaller, more personalized scale.  Rules regarding the hiring of household employees and family members are available, as well as tax information related to spouse-owned businesses.  Relevant examples are provided throughout the website to offer clear-cut explanations for determining the requirements of the various businesses.

Anyone involved in a business, whether pursuing a start-up or managing a long established organization, will find the IRS website a valuable resource.  The information contained in their website not only provides assistance in determining who to hire but can also help a business set up relevant tax structures and stay informed of the latest changes in IRS rules.

The IRS website is meant to be used as a resource for business law compliance.  If you own a business and have not visited the site, consider giving it a try.  You may find new information that will help your business in the future.