Independent Contractor versus Employee
Employee or independent contractor employees are either one or the other. Individuals work status should be immediately established. Workers that should be classified as employees, but are not, may be excluded from workers compensation, unemployment benefits and, in many instances, group health and life insurance in addition to retirement benefits.
Many individuals are wrongly classified as “Independent Contractors” when they are actually employees. These instances are found in all categories of occupations. However, regardless of how an employer classifies an individual, it is always good to periodically reexamine this categorization.
Basically, if the individuals that you employ, you set their work hours, provide them with tools, tell them what to do, how to do it, and you are able to fire them, then you are most likely employing them, NOT engaging them as an independent contractor.
It really does not matter if you allow them freedom of action in their work day. The fact that you, as employer, have the legal right to control the method and results of their work is enough to demonstrate an employer/employee relationship.
Currently, the guidance the Internal Revenue Service (IRS) uses to legally classify employees is actually a list of twenty (20) factors that question the extent of employer control in the relationship between the employer and the individual in question.
They are most likely an Employee, if more than a few of these factors apply:
- someone tells the individual when, where and how to work;
- you, as the business owner, trained them to perform services in a particular fashion;
- their services are important and integral to the success of the business;
- their services are rendered personally;
- you, as the business owner hire, supervise, and pay individuals performing work;
- they have a continuing relationship with your small business;
- you, as the business owner, sets their work hours;
- they are required to work or be available to work full-time;
- they work on the small business’ premises, on a designated route or at locations designated by. you, the small business owner;
- they perform services in an order or sequence set by the small business owner;
- they submit reports, to you, the small business owner;
- they are paid hourly, weekly or monthly;
- the small business provides their tools, materials and/or other equipment;
- they have little to no significant investment in the small business;
- they do not make a profit or suffer losses from the small business;
- they normally work only for one business at a time;
- they do not offer their services to the others in the general public;
- you, the small business, has the right to fire them; and/or
- they have the right to quit or resign without incurring liability.
In the event you are still unsure whether the individual in question is an employee or independent contractor, you should check with the IRS, an attorney or perhaps a Certified Public Accountant (CPA).
Employee
If you have an Employer/Employee relationship, it does not matter whether they are actually called an “employee,” “partner,” “independent contractor,” they ARE still an Employee for tax purposes.
- The small business employer must withhold income tax on wages, pay Social Security tax (F ICA) and withhold the employee’s portion of FICA. Additionally, you, as Employer, are responsible for the Unemployment Tax (FUTA). You, as Employer, must give Employees a Form W-2 “Wage and Tax Statement,” showing the amount of taxes withheld.
- If you, as small business employer, do not withhold or deposit these taxes because you misclassified an individual as a “Independent Contractor,” then that employee will not be covered by Unemployment or Workers Compensation. You may incur larger tax liability at filing time, your employee(s) might incur larger tax liability as well as other liability associated with this mistake – including liability for their lack of coverage under your small business’ Workers’ Comp Insurance policy.
Independent Contractor
In the event some individual has the right to control only the result of their work and not the way in which they get that result, then they might be an independent contractor. For tax purposes, they may get a Form 1099 – “Miscellaneous – Miscellaneous Income,” from you, as small business owner, hiring them as an Independent Contractor.
- The Interdependent Contractor is responsible for paying their own income tax and self-employment tax. They may want to obtain IRS Publication 554 “Self-Employment Tax,” and Publication 505 “Tax Withholding and Estimated Tax.”
- An Independent Contractor may have their own employees, or you, as Small Business Owner may be hiring other Independent Contractors (Subcontractors). Obtain Publication 15 “Circular E, Employers Tax Guide,” and Publication 937 to find out who has what your tax responsibilities.
