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

Hiring employees as independent contractors in Tennessee

In Tennessee, hiring employees as independent contractors to save money on taxes is not recommended. The state has strict requirements for determining whether a worker is an employee or an independent contractor, and misclassifying workers can result in penalties and legal consequences [1.1].

Requirements for independent contractors in Tennessee

To determine whether a worker is an independent contractor in Tennessee, the state uses a three-part test that considers the following factors [1.1]:

  1. Behavioral control: Does the employer control or have the right to control what the worker does and how the worker does the job?
  2. Financial control: Are the business aspects of the worker’s job controlled by the employer, such as how the worker is paid, whether expenses are reimbursed, and who provides tools/supplies?
  3. Relationship: What is the type of relationship between the worker and the employer? Is there a written contract? Are benefits provided? Is the work performed a key aspect of the employer’s business?

If the worker is determined to be an employee based on this test, the employer must pay state and federal payroll taxes, provide workers’ compensation insurance, and comply with other employment laws [1.1].

Apportionment of net worth

If a taxpayer’s principal business in Tennessee is that of a common carrier of persons or property for hire, or of an insurance company, the taxpayer’s net worth shall be apportioned to Tennessee on the basis of certain ratios [1.2].

Privilege tax for persons doing business in Tennessee

All persons doing business in Tennessee and having a substantial nexus in Tennessee, including any limited liability company regardless of how it is treated for federal income tax purposes, or any person exercising the corporate franchise, shall pay to the commissioner of revenue annually a privilege tax in addition to all other taxes [1.3].

Conclusion

In summary, hiring employees as independent contractors to save money on taxes in Tennessee is not recommended. The state has strict requirements for determining worker classification, and misclassifying workers can result in penalties and legal consequences. Employers should consult with legal and tax professionals to ensure compliance with state and federal employment laws. Additionally, businesses operating in Tennessee may be subject to a privilege tax and apportionment of net worth, depending on their principal business [1.1][1.2][1.3].

Source(s):
Jurisdiction

Tennessee