Article Posted on 01/15/2020
We often receive questions about whether someone should be treated as an employee or as an independent contractor. Unfortunately, there is often no definite answer and instead we must rely on tests of facts and circumstances established by common law and court cases.
The distinction is important because the employer must withhold federal, state, and social security tax on wages to employees. In addition, the business must also pay their share of social security tax and generally unemployment tax on wages to employees. Finally, if considered employees the workers should be entitled to the same fringe benefits and retirement plan options as the employee group.
This is not an all-inclusive list, but here are some of the main factors that the IRS will consider.
- Does the business have the right to make the worker follow instructions?
- Is there ongoing training and instruction of the worker?
- Does the business hire and supervise assistants for the worker in question?
- Does a continuing relationship between the business and the worker exist?
- Is the business requiring that the work be performed on business premises?
- Is payment to the worker by the hour, week, or month as opposed to by the job completed?
- Does the business supply the worker with the tools, materials, and equipment to do the job?
Answering yes to several of these questions may indicate that an employer/employee relationship exists. If most of the answers above are no, here are some other factors that may indicate an independent contractor relationship:
- Independent contractors have the potential to make either a profit or suffer a loss when their expenses exceed their income. Employees have no risk of loss for agreeing to employment.
- If a worker performs work for several unrelated businesses, this would be a factor pointing toward independent contractor status.
- Independent contractors typically make their services available to the general public on a regular basis.