Employee or Independent Contractor?

Why is it so important to correctly identify individuals as employees or independent contractors?  Generally, a business must withhold federal and state income taxes, and pay FICA tax and federal and state unemployment tax for an employee.  In most cases, they do not have to withhold or pay employment taxes on payments to independent contractors.  Businesses that misclassify employees as independent contractors can face substantial tax bills and penalties for failing pay employment taxes and also failing to submit tax forms.

Common Law Rules help in determining how an individual is classified.  Use facts to provide evidence of the degree of control and independence.

Behavioral: Does the business control what and how the worker does their job?

Financial: Does the business control how the worker is paid, provide the tools and supplies, and/or decide if expenses are reimbursed?

Type of Relationship: Is there a contract? Are there employee type benefits? Is the work performed a key aspect of the business? Is it an ongoing relationship?

Businesses can use the Common Law Rules to determine if an individual is an employee or independent contractor.  They need to examine the entire relationship with regards to degree of their control and keep documentation of the evidence used in the determination.

To Simplify…

If The Business Has The Right To Control Or Direct What Is Done And How It Is Done, Then The Worker Is Most Likely An Employee.

If The Business Can Only Control The Result Of The Work Done And Not How The Worker Accomplishes The Result, Then The Worker Is Most Likely An Independent Contractor

If you are still unsure after reviewing all evidence, the business or the worker can file Form SS-8 with the IRS for a determination.  Just know, this process can take 6 months or longer before a determination is made.