Independent Contractor or Employee
As a business owner, it is essential that you correctly determine whether individuals providing services to your company are employees or independent contractors. Generally, you are responsible for withholding of income taxes, withholding and payment of Social Security and Medicare taxes, and payment of unemployment tax on wages paid to an employee. Where the service provider is an independent contractor, you generally are not responsible for withholding or paying any taxes on the payments provided to the independent contractors.
If you are an independent contractor and engage, hire or otherwise subcontract work to other individuals, you also must determine whether the individuals you engage, hire or otherwise subcontract work to are independent contractors/subcontractors or employees.
Examine the business relationship that exists or will exist between you or your company and the individual performing the services. The individual performing the services may be -
- An independent contractor;
- An employee at common law;
- A statutory employee; or
- A statutory nonemployee.
In determining whether the individual providing the service, is an employee or an independent contractor, all evidence that shows a level of control and/or independence must be considered together.
A. Rules of Common Law
Evidence of the level of control and independence can be categorized as follows:
- Behavior considerations: Does your company control, or have the right to control, what the individual does and how the individual performs the individual’s job?
- Financial considerations: Does your company control the business aspects of the individual’s job? (for example, how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Relationship considerations: Does your company have written contracts with the individual or is the individual entitled to employee type benefits from the company (i.e. insurance, vacation, pension plan, etc.)? Will the relationship continue between your company and the individual? Is the work performed by the individual, a key aspect of the business?
All of these factors must be weighed when determining whether an individual service provider is an employee or independent contractor. “Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.”
The key is to look at all the factors and the entire relationship in its totality, considering the degree or extent of the right to direct and control by your company. The factors used to make your determination should be properly documented, in the event they are requested in the future.
B. Obtaining official determination.
If it is unclear as to whether an individual is an employee or an independent contractor after completing the above analysis, the IRS will provide you with an official determination of the individual service provider’s status upon the filing of the appropriate form. However, note, it may take at least six months to get a determination.
C. Consequences of misclassifying an Employee as an Independent Contractor
If you classify an employee as an independent contractor and the IRS determines that you have no reasonable basis for doing so, you may be held liable for employment taxes for that individual, which may include substantial penalties. In addition, workers compensation laws Typically impose substantial penalties for such misclassification of workers.
Please feel free to contact this office for a consulation during which we can discuss your employee - contractor issues Click here to schedule a consultation with Michelle L. Grenier, Esq.,
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