As a Pennsylvania small business owner, it may be your responsibility to classify your employees correctly with regard to whether they are actual employees or independent contractors. Classifying your employees appropriately from the outset is critical, because there are some very important distinctions between the two types of workers, and inaccurately claiming that an employee is an independent contractor can land you in some serious hot water.
In brief, independent contractors set their own hours, meaning labor laws do not apply to them, and independent contractors also typically have far more freedom and pay their own way with regard to payroll taxes. When you have formal employees, on the other hand, you are on the hook for more, tax-wise, which can lead some business owners to intentionally misclassify their workers. If you misclassify your workers and the Internal Revenue Service catches the error, however, you can anticipate an audit, and, quite possibly, considerable fines and fees.
What circumstances can trigger an audit?
There are very strict rules that govern the power you have as a business owner when it comes to your employees, and treating your independent contractors in the same manner you treat your employees is one way you can call unwanted attention to your business. For example, forcing your independent contractors to attend training sessions at specific times indicates that you are treating them more like employees than contract workers. If one of your contract workers files a claim for unemployment benefits, this, too, may capture the attention of the IRS.
Many modern business owners enjoy the benefits of working with independent contractors, both because it allows them to work with those who have exceptional abilities in a particular area, and because of the other perks involved in doing so. Being less than honest about whether workers are employees or independent contractors, however, can lead to serious trouble and considerable financial hardship.