Business Tools Downloadable checklists, model business plans, forms and other documents. Our small business online advice columnist. Each federal and state law imposing a payroll tax has its own definition of the types of workers to which the tax applies. In general, these rules say that your workers must be treated as employees if you have the right to direct and control the way they do their work, rather than merely the results of the work. Distinguishing common-law employees from contractors can be difficult, since every working relationship must be judged on its own particular facts.
Some independent contractors are taxable as employees , if they perform certain types of duties.
Some employees may be treated as nontaxable contractors , namely, real estate agents and direct sellers. Some family members are nontaxable , even if they are your employees. Again, the key issue is whether the workers are common-law employees, and that determination is unaffected by the number of hours the workers put in or by their age. You take on a significant risk if you improperly treat an employee as an independent contractor. The risk is that the IRS and your state tax authorities will hit you with penalties that at a minimum make you personally liable for paying, with interest, both the taxes you should have paid and the taxes you should have withheld.