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The obligation to withhold and to pay payroll taxes applies to employers with workers who are properly classified as employees as opposed to independent contractors. The key word is "properly" classified.

The benefit of having workers classified as independent contractors is that generally, businesses are not responsible for payroll tax obligations. On the other hand, only in rare circumstances will a business be relieved from payroll tax obligations with respect to employees. Proper classification requires that a business follow detailed criteria to distinguish between employees and independent contractors.

The IRS and the various state tax agencies rely on common law rules to distinguish employees from independent contractors. Under these rules, your workers are employees if you have the right to direct and control them in the way they work, both as to the final results and as to the details of when, where, and how their work is done.

Even if you grant your workers considerable discretion in determining how they do their work, as long as you retain the legal right to control their activities, the workers are common-law employees.

There are innumerable ways in which you can exercise control over a worker. There is no clear definition of just how much control on your part is enough to cause a worker to be classified as an employee rather than an independent contractor. Each case depends on an analysis of its own particular set of facts.

To assist you with this analysis:

• The IRS has published the 20 factors that its auditors use as guidelines in resolving the employee-or-contractor issue.
• There is a "safe haven" rule that generally allows you to treat a worker as not being an employee for employment tax purposes, regardless of the worker's actual status under the common-law test, under certain specified circumstances.
• You can obtain an IRS determination of the worker's status, if you're still uncertain about a worker's proper classification.