Workers are broadly classified as either employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not normally have to withhold or pay any taxes on payments made to independent contractors (that burden is left to the worker) and contractors typically do not participate in employer-sponsored benefit plans. Due to the relative simplicity and reduced expense of paying a worker as an independent contractor, many employers make a concerted effort to classify workers as independent contractors. However, if you classify an employee as an independent contractor without a reasonable basis for doing so, you may be held liable for employment taxes for that worker, plus interest and, potentially, penalties.
The determination of whether a worker is properly classified is not, ultimately, made by the employer. Rather, should a dispute arise the courts and/or various interested federal or state agencies will make that determination upon consideration of the facts of the employment. And, surprise, these agencies will aggressively seek a determination that employees were misclassified as contractors in order to make a claim that money is due to them.
The traditional test to determine whether a worker is an employee or independent contractor revolves around the concept of the employer’s control of the worker. In general, if the employer controls what is done by the worker and how it is done, the worker will be deemed an employee, not an independent contractor. The IRS lists the factors used to determine whether a worker is an independent contractor and, in general, at least a majority of these factors must weigh in favor of a finding that the worker is an independent contractor.
A “yes” answer to the following questions means that the worker is an employee:
- Does the principal provide instructions to the worker about when, where, and how he or she is to perform the work?
- Does the principal provide training to the worker?
- Are the services provided by the worker integrated into the principal’s business operations?
- Must the services be rendered personally by the worker?
- Does the principal hire, supervise and pay assistants to the worker?
- Is there a continuing relationship between the principal and the worker?
- Does the principal set the work hours and schedule?
- Does the worker devote substantially full time to the business of the principal?
- Is the work performed on the principal’s premises?
- Is the worker required to perform the services in an order or sequence set by the principal?
- Is the worker required to submit oral or written reports to the principal?
- Is the worker paid by the hour, week, or month?
- Does the principal have the right to discharge the worker at will?
- Can the worker terminate his or her relationship with the principal any time he or she wishes without incurring liability to the principal?
- Does the principal pay the business or traveling expenses of the worker?
A “yes” answer to the following questions indicates that the worker is an independent contractor:
- Does the worker furnish significant tools, materials and equipment?
- Does the worker have a significant investment in facilities?
- Can the worker realize a profit or loss as a result of his or her services?
- Does the worker provide services for more than one firm at a time?
- Does the worker make his or her services available to the general public?
While it is tempting to classify workers as independent contractors in order to save a few dollars and avoid paperwork, misclassifying them can lead to a far greater expense and a larger headache than ever anticipated.
This information about legal issues is for informational purposes only and is not intended to constitute advertising, invite an attorney-client relationship or serve as a source for legal advice. You should not rely upon any information contained herein for any purpose without seeking legal advice from a duly licensed attorney competent to practice law in your jurisdiction.