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Independent Contractor or Employee

Is a worker an employee or an independent contractor?

In hiring other people to work with you in your business, they may join you either as an employee or as an independent contractor. While it would be nice if you could freely decide which of these two working relationships you would prefer, it isn’t your wishes that rule. Rather, it is the facts and circumstances of the relationship.

Furthermore, the rules that determine who is an employee and who is an independent contractor are not simple or always clear-cut. As a result, it is easy to make a mistake in classifying someone working for you.

The penalties for making this mistake can be severe. It will pay you, therefore, to learn what follows and to correctly classify those you bring into your business.

Under federal, state and local tax laws, "employers" are required to deduct and withhold from their "employees" a percentage of wages to be paid to the taxing authorities to insure the payment of income taxes. No such withholdings are required for "independent contractors." Employers who fail to properly deduct and withhold the appropriate amounts and pay them over to the taxing authorities can be subject to penalties and interest charges. Employers are also obligated to withhold and deduct FICA (i.e., social security), unemployment and other taxes and charges. The Internal Revenue Service can, in certain cases, impose personal liability upon the "responsible party" at the employer that has failed to properly pay these taxes. Classification of an individual as an employee will also affect whether the hiring party is subject to federal and local wage and hour laws, employment discrimination and other laws.

To escape this withholding requirement, some employers have incorrectly classified employees as independent contractors. Often, the employees have gone along with this misclassification so part of their compensation would not be withheld.

To help you understand the rules that govern this matter, here are some of the things the Internal Revenue Service looks at when this issue arises:

1. Instructions to worker: A worker that is subject to instructions about when, where and how to work is usually an employee.

2. Training: An employee is more likely to be subject to training by the employer than an independent contractor.

3. Control over work: If the worker is subject to the typical controls of the business over how the work is performed, he or she is assumed to be an employee.

4. Requirement that services be personally performed: The greater the flexibility given the worker to designate who may perform services favors an independent contractor classification.

5. Hiring, supervising, and paying for a worker's assistants: If the business provides assistants to the worker, as opposed to the worker providing his or her own assistants, this may indicate that the worker is an employee.

6. Continuity of the relationship: Continuing, "on call" or similar long-term relationships, even if part-time, supports classification as an employee.

7. Setting the hours of work: An independent contractor usually sets his own work hours.

8. Requirement of full-time work: Independent contractors, unlike employees, do not normally work full-time for one business and are free to work when and for whom they choose.

9. Working on employer premises: If the business requires work to be performed at its offices, this indicates control over the worker (if the work could be done elsewhere).

10. Setting the order or sequence of work: Independent contractors generally have greater freedom to follow their own pattern of work routines and schedules.

11. Requiring oral or written reports: Regularly required oral or written reports usually reflect an employee relationship.

12. Paying worker by hour, week, or month: Employees are normally paid hourly, weekly, or monthly, while independent contractors are usually paid by the job or on a straight commission basis.

13. Payment of worker's business and/or traveling expenses: This factor reflects a business' effort to control its expenses through an employee.

14. Furnishing worker's tools and materials: Employees are normally provided necessary work tools and materials, independent contractors tend to furnish their own.

15. Significant investment by worker: Employees are normally provided the requisite facilities by their employer, while independent contractors usually invest in and maintain their own work facilities.

16. Realization of profit or loss by worker: A worker who can realize a profit or suffer a loss as a result of his services is generally an independent contractor. Of course, some employees may also realize a profit or suffer a loss, as a result of profit sharing plans or investments in the company. In that case, the IRS will examine whether the worker's profit or loss opportunities are different from an employee's.

17. Working for more than one business at a time: Employees usually work for only one company, while independent contractors frequently work for more than one business.

18. Firm's right to discharge worker: An employer exercises control over its employee through the threat of dismissal, while independent contractors normally cannot be dismissed so long as they meet their contractual obligations.

19. Worker's right to terminate relationship: Employees are usually entitled to quit at their leisure, while independent contractors generally must fulfill contractual obligations.

20. Availability of worker's services to the general public: If the worker usually makes himself or herself available to the public to perform services, he or she is more likely an independent contractor. home page.