Article courtesy of Payne Financial Group's Benefits Buzz newsletter, February 2011 issue.

Knowing the difference between an employee and an independent contractor is essential. The IRS provides seven things business owners should know:

1. The IRS uses three factors to determine the relationship between businesses and workers:

- Behavioral control - Does business have right to direct how the work is done through training, instructions, etc.?

- Financial control - Does the business have the right to control the financial and business aspects of the worker's job?

- Type of relationship - How do the workers and business owner perceive their relationship?

2. If you have the right to control not only what is to be done, but also how it is done, your workers are likely employees.

3. If you can direct only the result of the work done (not means of accomplishing the result), your workers are probably independent contractors.

4. Employers who misclassify workers as independent contractors can end up with substantial tax bills and face penalties.

5. Workers can avoid higher tax bills and lost benefits if they know their proper status.

6. Both employers and workers can ask the IRS to determine whether the individual is an employee or independent contractor, by filing a Form SS-8.

7. To learn more, visit the IRS website: www.irs.gov/businesses/small/article/0,,id=99921,00.html.