Classifying Workers as Independent Contractors or Employees

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Dear M & M:

I am unclear as to whether I am classifying my workers as independent contractors or as an employee?

-Bill

Dear Bill:

If your small business uses both employees and independent contractors you may think there are few differences between them – they do the same work, have similar goals and you pay them both for their contributions. But regardless of whether you see any day-to-day differences, the IRS does.

How the IRS Sees It: The fundamental difference between an employer and independent contractor from a tax point of view is that an employer withholds employment taxes from its employees but is not required to do so for independent contractors. However, the definition of what constitutes an independent contractor versus an employee may not be readily apparent. According to the IRS, “In general, someone who performs services for you is your employee if you can control what will be done and how it will be done.” For example, if you exert any type of control over when, where and how the actual work is performed by an independent contractor, you may be getting into murky waters. For more on this and other criteria that come into play when classifying workers check out this SBA guide: Independent Contractor vs. Employees.

An Independent Contractor: Operates under a business name, Has his/her own employees, Maintains a separate business checking account, Advertises his/her business’ services, Invoices for work completed, Has more than one client, Has own tools and sets own hours, Keeps business records. An Employee: Performs duties dictated or controlled by others, is given training for work to be done, Works for only one employer. Employment Information: There is no single test for determining if an individual is an independent contractor or an employee under the Fair Labor Standards Act. However, the following guidelines should be taken into account: The extent to which the services rendered are an integral part of the principal’s business – The permanency of the relationship – The amount of the alleged contractor’s investment in facilities and equipment – The nature and degree of control by the principal – The alleged contractor’s opportunities for profit and loss – The amount of initiative, judgment, or foresight in open market competition with others that is required for the success of the claimed independent contractor – The degree of independent business organization and operation – Whether a person is an independent contractor or an employee generally depends on the amount of control exercised by the employer over the work being done. Read Equal Employment Opportunity Laws – Who’s Covered? For more information on how to determine whether a person is an independent contractor or an employee, and which are covered under federal laws. How to

Determine Whether Your Contractor Should Be Considered an Employee: Firms and workers can file Form SS-8 to request a determination of the status of a worker for purposes of federal employment taxes and income tax withholding. Filing a Form SS-8 requesting a “worker status” determination means you or the firm is asking the IRS Service to establish if the services you provide to the firm are those of an employee or an independent contractor. To help businesses make a clear distinction between contractors and employees, the IRS publishes clear guidelines and will even help you make a worker status determination using Form SS-8. Sometimes, it is not a straightforward matter to determine who is an independent contractor and who should be classified as an employee. To make a determination, the IRS in the USA advises taxpayers to look at three aspects of the employment arrangement: financial control, behavioral control, and relationship between the parties. While some independent contractors may work for a number of different organizations throughout the year, there are also many who retain independent contractor status even though they work for the same organization for the entire year. Generally speaking, independent contractors retain control over their schedule and number of hours worked, jobs accepted, and performance of their job. In addition, they may have a major investment in equipment, furnish all their own supplies, provide their own insurance, repairs, and all other expenses related to their business. They may also perform a special service that is not in the normal course of business of the employer. This contrasts with the situation for regular employees, who usually work at the schedule required by the employer and whose performance is directly supervised by the employer. However many companies (particularly in the freight transport industry) specify the contractor’s schedule, require purchase of vehicles from the company and prohibit work for other companies. As always consult your tax adviser, CPA or human resources specialist for your company’s unique situation when classifying a worker as an employee or independent contractor.-SBA

 -M&M

To ask your questions: Call the Small Business Development Center(SBDC) at Cochise College (520)-515-5478 or email schmittm@cochise.edu or contact the Sierra Vista Economic Development Foundation(EDF) at 520-458-6948 or email  hollism@svedf.org

 

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