Small Business Tax Savings Podcast Independent Contractor or Employee? Hiring Mistakes That Trigger an IRS Audit
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Aug 27, 2025 Misclassifying workers can lead to serious IRS audits and financial chaos. Understanding the IRS's three-factor test is crucial for distinguishing employees from independent contractors. Red flags like unemployment claims can trigger audits, so knowing how to classify your workers correctly can save you from hefty penalties. The podcast also delves into the tax implications for each worker type, helping business owners navigate their responsibilities and avoid costly mistakes. Protect your business while uncovering beneficial tax strategies!
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Costly Misclassification Case
- A client hired a freelancer as a 1099 but treated them like an employee without withholding taxes.
- Reclassifying that worker could cost the employer tens of thousands in back FICA, penalties, and interest across multiple years.
IRS Three-Factor Framework
- The IRS uses a three-factor test: behavioral control, financial control, and the relationship.
- These three areas together determine whether a worker is an employee or independent contractor.
Minimize Behavioral Control
- Limit your control over how work is performed if you want a true contractor relationship.
- Avoid dictating hours, tools, and methods to reduce employee classification risk.