The small-business owner often does not fully understand the effect of classifying an individual as an independent contractor, the small business will not be liable for employment taxes, worker’s compensation, disability, pension, health care and more. This leads most small business owners to believe they can save money by classifying a worker as an independent contractor. If the Internal Revenue Service disagrees with the classification, the employer may be creating a disastrous situation. You could put yourself and your business in a position that could cost thousands of dollars in back taxes, interest and penalties. Also, you cannot just walk away from employment taxes by dissolving your corporation, because the portion of employment taxes which represents escrow funds (federal and state withholding and employee’s share of Social Security and Medicare taxes) will become personal liabilities of the owners and certain officers of the corporation.

The "employee vs. independent contractor" decision is of major importance to all businesses. Currently, the IRS requires that you wade through a 20-factor common-law test to determine how to properly classify a worker. The focal point of the test is to determine the employer’s "degree of control and direction" over a worker. It is a guideline used to indicate the extent of direction and control that is present in any given situation. Generally, if there is a right to control how the services are to be performed, you will be treated as an employee; if the workers themselves determine how the work is to be performed, they will be treated as an independent contractor.