Business owners must carefully consider how the people working for them are classified. There is a fine line between being identified as a contractor or employee on the job. Owners must know the difference to avoid being penalized.

Worker classification determines if an employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee. Businesses do not have to withhold or pay any taxes on payments to independent contractors. The earnings of a person working as an independent contractor are subject to self-employment tax.

There are federal and state rules for determining if a person is an employee or contractor. Employers must follow both sets of guidelines when classifying workers.

Reprinted courtesy of Martin C. McCarthy, Construction Executive, a publication of Associated Builders and Contractors. All rights reserved.

Mr. McCarthy may be contacted at marty.mccarthy@mcc-cpas.com