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Are they employees or independent contractors?

Tax law often touches on other legal subjects, such as employment law. A Maryland business must be careful to avoid missteps in hiring workers, or state tax authorities could strike.

A big issue for employers is how to classify its workers. Many businesses try to keep the number of actual “employees” to a minimum, and largely use “independent contractors” instead. This has several advantages, because contractors typically receive lower pay and fewer benefits, and are easier to fire or lay off than an employee protected by state and federal law. In addition, employers need not withhold pay for Social Security, Medicare and voluntary withholding.

Relying on contract workers is not illegal, but an employer must be careful not to misclassify its workers. Labeling a worker a contractor for tax purposes when he or she is really an employee, both state and federal authorities will want the taxes the employer should have been withholding.

There are many factors when determining whether a worker is an employee or an independent contractor, and the distinction is not necessarily black and white. A few examples of the potential differences are:

  • An employee usually only works for one employer. A contractor can work for more than one business.
  • An employee tends to work set hours, while an independent contractor sets his or her own hours.
  • An employee works under the control and direction of the employer. A contractor works relatively independently, and can decide how to accomplish his or her work tasks.

If your business is accused of misclassifying employees, you will need vigorous and experienced legal help to avoid a hefty tax bill and other penalties.

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