This can be a very tricky and costly issue for entrepreneurs and small business. Here is an updated look at the issues.
To avoid a paperwork burden and the expense of payroll taxes, some employers inappropriately designate workers “independent contractors”. In recent years, the Internal Revenue Service (IRS) has sought out and imposed severe penalties on companies that treat employees as independent contractors and fail to withhold taxes. If the IRS later determines that the workers is actually an “employee,” the company and the person responsible for the collection and payment of withholding taxes may be held personally liable for the taxes that should have been withheld. It is in a businesses’ best interest to get this correct from the beginning. Government agencies such as the IRS, California Franchise Tax Board (FTB) and the US Labor Department have a responsibility to make sure all appropriate taxes are paid and worker’s rights are upheld. An employer must withhold income taxes, Social Security, Medicare taxes, and pay unemployment taxes on wages paid to an employee. An business does not generally have to withhold taxes from payments to independent contractors.
To help determine whether an individual is an employee, there are twenty factors that are used as guidelines to determine if an employer-employee relationship exists. Each case is different and different government agencies may see the same case differently. But they all use these kinds of questions to determine their rulings.
The more factors that describe a worker’s situation, the more likely a worker will be ruled as an employee. Meeting just one of the conditions may determine the worker to be an employee. These factors should be considered guidelines. Not every factor is applicable in every situation, and the degree of importance of each factor varies depending on the type of work and the individual circumstances.
It does not matter that a written agreement may take a position with regard to any factors or state that certain factors do not apply, if the facts indicate otherwise. If a company is unable to determine the appropriate designation from these worker guidelines, the IRS will help. File IRS form SS-8 and the IRS will respond with a determination.
Government Authorities’ 20 Consideration Factors
The 20 factors indicating whether an individual is an employee or an independent contractor are:
1. Instructions. An employee must comply with instructions about when, where, and how to work. Even if no instructions are given, the control factor is present if the employer has the right to control how the work results are achieved. A contractor has a choice of accepting a work project, an employee does not have a choice.
2. Training. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods and receive no training from the purchasers of their service. Employees can be required to attend company meetings, a contractor cannot be required to attend meetings.
3. Integration. An employee’s services are usually integrated into the business operations because the services are important to the success or continuation of the business. This shows that the employee is subject to direction and control. Does the employer have employees doing the same type of work as the contractor?
4. Services rendered personally. An employee renders services personally. This shows that the employer is interested in the methods as well as the results.
5. Hiring assistants. An employee works for an employer who hires, supervises, and pays workers. An independent contractor can hire, supervise, and pay assistants under a contract that requires him or her to provide materials and labor and to be responsible only for the result. Does the company require approval of contractor’s assistants?
6. Continuing relationship. An employee generally has a continuing relationship with an employer. A continuing relationship may exist even if work is performed at recurring although irregular intervals.
7. Set hours of work. An employee usually has set hours and routine of work established by an employer. An independent contractor generally can set his or her own work hours and routine.
8. Full-time required: An employee may be required to work or be available full-time. This indicates control by the employer. An independent contractor can work when and for whom he or she chooses.
9. Work done on premises. An employee usually works on the premises of an employer, or works on a route or at a location designated by an employer.
10. Order or sequence set. An employee may be required to perform services in the order or sequence set by the employer. This shows that the employee is subject to direction and control.
11. Reports. An employee may be required to submit reports to an employer. This shows that the employer maintains a degree of control.
12. Payments. An employee is generally paid by the hour, week, or month, and can take a draw against future commissions or earnings. An independent contractor is usually paid by the job or on straight commission.
13. Expenses. An employee’s business travel expenses are generally paid by an employer. This shows that the employee is subject to regulation and control.
14. Tools and materials. An employee is normally furnished significant tools, supplies, materials, and other equipment by the employer. Leasing tools, space or selling supplies to a contractor is risky.
15. Investment. An independent contractor has a significant investment in the facilities he or she uses in performing services for someone else.
16. Profit and loss. An independent contractor can make a profit or suffer a loss.
17. Works for more than one person or firm. An independent contractor is generally free to provide his or her services to two or more unrelated persons or firms at the same time.
18. Offers services to the general public. An independent contractor makes his or her services available to the general public.
19. Right to fire. An employee can be dismissed by an employer. An independent contractor cannot be fired so long as he or she produces a result that meets the specifications of the contract.
20. Right to quit. An employee can quit his or her job at any time without incurring liability. An independent contractor usually agrees to complete a specific job and is responsible for its satisfactory completion, or is legally obligated to make a good for failure to complete it.
SCORE Employee or independent contractor? Updated from 3/2014
By: Dick Mader, Certified SCORE of Greater Los Angeles Mentor