Employee or Independent Contractor? - ABC's of Small Business

Employee or Independent Contractor

How can you decide if someone who is doing work for your business is your employee or a contractor? It's tempting to have him/her be independent because then your business does not have to pay the employer's part of Social Security taxes, other employment taxes, workers compensation, and/or benefits. Using contractors can save your business serious money, provided you meet the IRS (Internal Revenue Service) tests for an independent contractor relationship.

The key to deciding if a person working for you is a contractor or an employee is the relationship between your business and the worker. Does your business have control over how the worker does the job? What are the business practices and the overall relationship between your business and the worker?

Your business has behavioral control if it can tell the worker how to do the job. Do you teach him or her how to do the job? Do you in other ways take control of how the work gets done?

The IRS tests for financial control by examining how much control the business exerts. It also considers your rights to control the business parts of the worker's job. This includes:

Does the worker pay for business expenses that are not paid back by your company?
How much does the worker invest in training, equipment, real estate costs, utilities, taxes and other costs to set up and keep the business running?
Can the worker do work for other businesses, including competitors, at the same time?
Does the business give the worker benefits like contributions to a pension plan, vacation, sick pay, insurance or other benefits?
How do you pay the worker? Is it based on hourly work or by the job? Is payment ever made in advance or as milestones (specific goals) are met?
Does the worker run a chance of losing money on the job? Can he or she make a significant profit?
Do you have a contract with the worker? If so, the IRS will use this information to help decide whether it covers an employee or an independent worker.

The IRS will look at whether workers in similar jobs in your industry are usually treated as contractors or employees. They will decide if the job must be done as part of the regular business of your company. They will consider the length of the job: Is the job for a stated time or until completion of a project, or will it continue for an unstated amount of time?

The IRS can provide more information for you in Publication 15-A, Employer's Supplemental Tax Guide at: http://www.irs.ustreas.gov/prod/forms_pubs/pubs/
p15atoc.htm

If you want the IRS to tell you if one of your workers is independent or an employee, send them form Form SS-8 which can be requested by calling 1-800-829-3676.

- Cynthia Nemeth-Johannes