Classifying workers as independent contractors has several tax benefits because it reduces the employer’s payroll tax withholdings, FICA contributions, and health insurance premiums among other things.
Misclassification, however, is a serious problem because it can result in large payroll taxes and penalties. In a report released in 2009, the IRS estimated 15% of employers misclassified 3.4 million workers, which resulted in the loss of $1.6 billion in tax revenue.
To help employers better determine whether a worker is an employee or independent contractor, the IRS has put together a 160 page guide for your reference available on their website: http://www.irs.gov/pub/irs-utl/emporind.pdf.
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