Classify Your Employees CorrectlyStay legal by understanding the difference between employees and independent contractors.

While independent contractors mean lower payroll costs, beadvised that the IRS scrutinizes this whole area very carefully. Itwants to make sure your workers are properly classified and payingthe government the necessary income and payroll taxes that aredue.

To stay out of hot water with the IRS, be sure the workers youclassify as independent contractor. The IRS has a 20-point test itsauditors use to determine the proper classification. Here are someof the major points:

• Who has control?A worker is an employee if the personfor whom he works has the right to direct and control him in theway he works, both as to the final results and as to the details ofwhen, where and how the work is done. The employer need notactually exercise control; it's sufficient that he has theright to do so.
• Right to fire.An employer can fire an employee. Anindependent contractor can't be fired so long as he or sheproduces a result that meets the specifications of thecontract.
• Training.An employee may be trained to perform servicesin a particular manner. Independent contractors ordinarily usetheir own methods and receive no training from the employer.

Excerpted fromStart Your Own Business