Many small businesses use both employees and independent contractors. Getting the difference right matters, because misclassification can lead to back taxes and penalties.

What the IRS looks at

There is no single test. The IRS generally considers:

• Behavioral control: do you control how the work is done?
• Financial control: who pays expenses, and can the worker make a profit or loss?
• The relationship: are there benefits, a contract or an ongoing arrangement?

Simply calling someone a contractor, or having them sign an agreement, may not be enough.

What each one means

For employees, you generally withhold taxes, pay the employer's share of payroll taxes and report wages on Form W-2. For contractors, you generally do not withhold, but you may need to file Form 1099-NEC.

Form 1099-NEC

The reporting threshold has been $600. For payments made after 2025, the threshold rises to $2,000, with inflation adjustments in later years. Collect a Form W-9 before you pay a new contractor.

If you are unsure

Other rules, including Florida reemployment tax and federal labor laws, may use different tests. If you think that someone may be misclassified, talk to a professional. There may be ways to correct the problem.

Have questions about your situation? Tax rules change and every situation is different, so please talk with a professional before acting on general information. Call Fajardo & Associates at 407-720-7220 to make an appointment.