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Can I hire employees as independent contractors to save money on taxes in Kentucky? What are the requirements?

Hiring Employees as Independent Contractors in Kentucky

In Kentucky, employers must properly classify their workers as either employees or independent contractors. Misclassifying employees as independent contractors can result in significant penalties and legal consequences [1.1].

To determine whether a worker is an employee or an independent contractor, Kentucky uses the “ABC test.” Under this test, a worker is presumed to be an employee unless the employer can show that:

  1. The worker is free from control and direction in the performance of the service, both under the contract for the performance of service and in fact;
  2. The service is performed outside the usual course of the business of the employer; and
  3. The worker is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed [1.1].

If the employer cannot meet all three prongs of the ABC test, the worker is considered an employee and must be treated as such for tax purposes. This means that the employer must withhold and pay income taxes, Social Security and Medicare taxes, and unemployment taxes on behalf of the employee [1.1].

Requirements for Hiring Independent Contractors in Kentucky

If a worker is properly classified as an independent contractor, the employer is not required to withhold or pay taxes on behalf of the worker. However, there are specific requirements that must be met in order to hire workers as independent contractors in Kentucky [1.1]:

  1. The worker must be free from control and direction in the performance of the service, both under the contract for the performance of service and in fact;
  2. The service must be performed outside the usual course of the business of the employer; and
  3. The worker must be customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.

If an employer misclassifies an employee as an independent contractor, they may be subject to penalties and legal consequences. It is important to properly classify workers to avoid these issues [1.1].

Tax Credits for Employee Job Assessment Fees

Kentucky offers tax credits for employee job assessment fees [2.1]. The approved company is entitled to a tax credit equal to 100% of the income tax and 100% of the limited liability entity tax imposed by KRS 141.0401 that would otherwise be due to the Commonwealth by the approved company attributable to the economic development project [2.1].

Conclusion

In Kentucky, employers must properly classify their workers as either employees or independent contractors. Misclassifying employees as independent contractors can result in significant penalties and legal consequences. To hire workers as independent contractors, specific requirements must be met. It is important to properly classify workers to avoid legal issues [1.1]. Kentucky also offers tax credits for employee job assessment fees [2.1].

Source(s):
Jurisdiction

Kentucky