One potential business tax reduction strategy is to hire independent contractors instead of employees. If a worker’s classification fits within the tax law, it’s a legitimate strategy that can save you thousands of dollars. But sometimes the classification isn’t clear-cut. You may think you have the independent contractor classification correct, but when the IRS does the audit, you could learn the IRS considers those contractors W-2 employees. This can cost you a huge sum of money in back payroll taxes.
The law requires that you withhold taxes on the wages you pay to your employees. If you don’t, you are liable for the withholding and FICA (i.e., Social Security and Medicare) taxes that you neglected to remit to the IRS. Thus, if the IRS reclassifies your independent contractors as W-2 employees, you are on the hook for the taxes you should have taken from the paychecks.
But you have a way out of a big chunk of this potential tax bill: If you can show the worker paid the taxes, then you aren’t liable for them. This rule prevents the taxes from being paid twice. For this favorable treatment, which is on a worker-by-worker basis, you need the worker to sign IRS Form 4669, Statement of Payments Received.