There are several advantages for a business to hire independent contractors rather than employees. Businesses are not required to pay payroll taxes for independent contractors nor are they required to maintain workers’ compensation and unemployment compensation insurance. As a result, it can be tempting for a business to classify workers as independent contractors rather than employees in order to save money.
If an employer classifies a worker incorrectly, the financial consequences can be severe. If the Internal Revenue Service or the Minnesota Department of Revenue determines that a worker who has been classified as an independent contract is really an employee, then the employer can be assessed past due taxes, interest, and penalties from the date the worker was hired.
Generally, whether a worker is classified as independent contractor or employee depends on the control the employer exerts over the worker. Does the employer Control the hours or location of the work? Does the worker work for other businesses? Does the business furnish the worker with computers or equipment for doing the work? It can also make a difference whether the industry generally classifies workers as independent contractors or employees.
If there is a large amount of money at stake, the business can get an advance ruling from the Internal Revenue Service or the Minnesota Department of Revenue as to whether a particular worker should be classified as employee or independent contractor.