Employee or Independent Contractor?
This Classification Determines Whether Payroll Taxes are
Required
For some business owners, determining whether a worker is an employee or
an independent contractor can be tricky. Generally, you must withhold
income taxes, withhold and pay social security and Medicare taxes and pay
unemployment tax on wages paid to an employee. However, you don’t
generally have to withhold or pay any taxes on payments made to
independent contractors.
There is a misconception that you may be able to choose which
classification works best for your company. In reality, however, the facts
and circumstances impose the worker status. In determining whether the
person providing a service is an employee or an independent contractor,
you must consider all information that provides evidence of the degree of
control and independence. You’ll need to answer these four questions:
-
Does the company control or have the right to control what the worker does
and how the worker does his or her job?
-
Are the business aspects of the worker’s job controlled by the payer?
Examples include how a worker is paid, whether expenses are reimbursed and
who provides tools/supplies.
-
Are there written contracts or employee-type benefits like a pension plan,
insurance, vacation pay?
-
Will the relationship continue and is the work performed a key aspect of
the business?
Businesses must weigh all these factors when determining whether a worker
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. No set number of factors makes the worker an
employee or an independent contractor and no single factor stands alone in
making this determination. The concept is to look at the entire business
relationship, consider the degree or extent of the right to direct and
control, and finally, to document each of the factors used in coming up
with the determination.
If you classify an employee as an independent contractor and you have no
reasonable basis for doing so, you may be held liable for employment taxes
for that worker. File a Form SS-8 with the IRS if the factors for
determining worker status remain unclear.
