Determine Worker Status Ahead of Tax Season
Like any other business or organization, community associations must file taxes with the government. And tax liability is a huge issue that associations need to be aware of. Improper reporting can land the association in hot water and cost thousands in fines, penalties, and late fees. This is especially tricky when it comes to your employees. April—the month in which federal and state taxes must be filed—is around the corner.
It’s important to understand tax law basics when it comes to employees—which will be a major tax consideration for you. Tax law classifies workers as either “independent contractors” or “employees.” Independent contractors pay their own employment taxes. Employers are responsible for their employees’ employment taxes. The IRS can audit employers to find out if the workers they call independent contractors are really employees. Some employers call workers “independent contractors” in order to avoid taxes. But if the IRS audits your association and decides to reclassify an employee that you treated as an independent contractor, you might have to come up with big tax payments, interest, and penalties.
There are multiple factors the IRS—and state and local tax agencies—use to distinguish employees from independent contractors. One of these factors is the issue of control. Basically, if you have the right to control and direct how a worker performs the job, the IRS says the worker is an employee, even if you and the worker have agreed otherwise.
The amount of training you have given employees is also an issue. The more you train workers, the more likely they will be considered employees. An independent contractor should have the necessary skills, expertise, and experience to get the job done without the need for training. Keep in mind that requiring workers to attend regular company meetings that you hold for other employees is considered training.
For an explanation of 14 more factors that will help you decide whether to treat an individual worker as an employee or independent contractor, and a sample questionnaire, see “Consider 16 Factors to Avoid Tax Liability for Worker Classification,” available to subscribers here.