Employee or Independent Contractor?

The IRS encourages all businesses and business owners to know the rules when it comes to classifying a worker as an employee or an independent contractor.

An employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee. Employers normally do not have to withhold or pay any taxes on payments to independent contractors.

Here are two key points for small business owners to keep in mind when it comes to classifying workers:

1. Control. The relationship between a worker and a business is important. If the business controls what work is accomplished and directs how it is done, it exerts behavioral control. If the business directs or controls financial and certain relevant aspects of a worker’s job, it exercises financial control. This includes:

• The extent of the worker's investment in the facilities or tools used in performing services
• The extent to which the worker makes his or her services available to the relevant market
• How the business pays the worker, and
• The extent to which the worker can realize a profit or incur a loss

2. Relationship. How the employer and worker perceive their relationship is also important for determining worker status. Key topics to think about include:

• Written contracts describing the relationship the parties intended to create
• Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation or sick pay
• The permanency of the relationship, and
• The extent to which services performed by the worker are a key aspect of the regular business of the company
• The extent to which the worker has unreimbursed business expenses

Source: Internal Revenue Service

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Are you Considered an Independent Contractor ?

To be considered an independent contractor, generally a person has independence to perform work and is not subordinate to a company's directives and regulations, and there is no exclusivity in the relationship between the parties.

Most all countries uphold independent contractor status if the service provider can truthfully answer "yes" to five questions:

1. Do you have "authoritative control" to do your work the way you want to — free from instruction on process, free from discipline, free from work rules, free from your principal's "supervision and control"?
2. Are you free to set your own schedule and hours?
3. Do you provide your own office and supplies, pay your own business expenses, and hire your own assistants?
4. Do you get paid only for work done, such as hourly/task pay (no paid vacations/holidays)?
5. Can you, and do you, have other paying clients — and do you market your services to the public?

It is a good idea to keep the line between an employee and a contractor very clear, which is best done through an explicit independent contractor agreement.  A contractor's agreement to perform services should clearly state the type of relationship that exists and should outline the terms of service and specific deliverables.  It should not specify any control over the method in which the work is performed.  The company should not direct how the work is done, through instructions, training, or control over how the contractor spends money earned by the contract, or any other means.  Clarifying the relationship in a contract benefits both the company and the contractor by preventing tax issues from arising that could put both parties at risk of being investigated.

 

contact@officetaxservices.com

(858)247-1680