Employee or Independent Contractor? | Monday December 29th, 2003 | |
The distinction between employee and independent contractor can be hazy, and misclassification can have serious consequences.
Whether to treat workers as employees or independent contractors is a vital decision for any business. An employer must generally
withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes on employee wages.
An employer does not generally have to withhold or pay any taxes on payments to independent contractors.
Generally,
a worker is either an independent contractor or an employee. It's important to understand and observe legal and practical
distinctions between employees and independent contractors. There are potentially serious financial consequences
if "independent contractors" are later found to be "employees." The employer could be liable for unpaid taxes,
insurance, severance pay and other employee benefits for wrongfully classifying "employees" as "independent
contractors."
To determine whether an individual is an employee or an independent contractor under the common law,
the relationship of the worker and the business must be examined. All evidence of control and independence
must be considered. Factors that provide evidence of the degree of control and independence fall into three categories:
a) behavioral control,
b) financial control, and
c) the relationship of the parties.
In each case, it is very important to consider all the facts to determine the appropriate classification.
A worker is an employee when the business has the right to direct and control the worker. For example,
if you receive extensive instructions on when, where, and how the work is to be done, this suggests that
you may be an employee. Instructions can cover a wide range of topics including:
What tools or equipment to use
What workers to hire or to assist with the work
Where to purchase supplies and services
What work must be performed by a specified individual
What order or sequence to follow
The key consideration is whether the business has retained the right to control the details of a worker's
performance or has given up that right.
If the business provides you with training about required procedures and methods, this suggests
that the business wants the work done in a certain way, and you may be an employee. Independent
contractors ordinarily use their own methods and process.
Financial Control
An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other
period of time. This usually indicates that a worker is an employee, even when the wage or
salary is supplemented by a commission. An independent contractor is usually paid by a flat
fee for the job. However, it is common in some professions, such as law, to pay independent
contractors hourly.
Independent contractors often have significant investment in the assets they use in performing services
for someone else. However, a significant investment is not necessary for independent contractor status.
In addition, independent contractors are more likely to have unreimbursed expenses versus employees.
Fixed ongoing costs incurred are important regardless of whether the work is currently being performed.
However, employees may also incur unreimbursed expenses in connection with the services they perform
for the business.
Relationship of the Parties
If you receive benefits such as insurance, a pension plan, vacation pay, or sick pay this is an
indication that you are an employee. If you do not receive benefits, however, you could be either
an employee (e.g. part-time employee) or an independent contractor.
A written contract may detail both what you and the business intend. This may be very significant if it is
difficult, if not impossible, to determine the status based on other facts.
If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a
specific project or period, this is generally considered evidence that your intent was to create an
employer-employee relationship.
Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding
Publication 1779, Employee Independent Contractor Brochure
Publication 15-A, Employer's Supplemental Tax Guide
Tax Topic 762, Independent contractor vs. employee
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