Although they may perform similar duties, the IRS views independent contractors, employees, and the firms employing them differently. Deciding if the individual providing a service is an independent contractor or employee depends primarily on the employer’s level of control over the work.
An employee typically performs duties controlled or dictated by others. In many situations, employees are provided training to do the job, and they usually work for just one boss. On the other hand, independent contractors have multiple clients and their own tools such as digital devices, make their schedules, and invoice for the completed work.
Tax Classification of Employees and Independent Contractors
Business owners and sole proprietors are often confused on how to classify an employee versus an individual contractor. However, correctly classifying workers may save businesses a lot of money and benefit coverages, such as workers’ compensation, group health, as well as unemployment insurance and social security taxes. Distinctions between the two include the following:
- Employees. Classifying workers as employees requires a business to withhold income taxes, pay half of the FICA and FUTA taxes, state unemployment insurance tax, and workers’ compensation insurance.
- Independent contractors. In most instances, the only tax form employers must submit at the end of the tax year is Form 1099-MISC for those workers who are classified as independent contractors.
It is critical to ensure that workers are classified accurately because misclassifications can result in significant liabilities for the employer.
Determining Whether Workers Are Employees or Independent Contractors
The IRS is presumably the most influential agency to please for classifying a worker as an employee or an independent contractor. Under the IRS’s analysis, workers are considered employees if the business they work for has the right to control and direct the way they work, such as the details of how, where, and when the job is performed. In contrast, the IRS considers workers as independent contractors if the organization they work for does not control how they work, except to accept or reject their submitted work.
The IRS studies a variety of determinants when deciding if a worker is an independent contractor or an employee. It is more apt to classify a worker as an independent contractor under the following circumstances:
- They suffer a loss or earn a profit from the work performed.
- They provide the materials and tools necessary to do the work.
- They receive pay for the work performed.
- They work for more than one company at a time.
- They invest in equipment and facilities.
- They pay for their own business and traveling expenses.
- They hire and pay assistants.
- They set their work schedule.
Conversely, the IRS is more inclined to consider a worker as an employee who satisfies the following criteria:
- They receive hourly pay.
- They can be terminated at will.
- They collect employee benefits.
- They work full time for the company.
- They can quit without inciting liability.
- They receive training from the company.
- They receive instructions from the company.
- They provide services that are an essential component of the company’s daily operations.
Unfortunately, there are as many analyses to decide if a worker is as an independent contractor or an employee as there are government agencies that manage them. Figuring out how to classify a worker so that agencies recognize them as an independent contractor or an employee can be a complex task.
Making a Determination
Corporations must consider all of these factors when deciding if a worker is an employee or an independent contractor. There is not a set amount of factors that qualifies a worker as an employee or an independent contractor, and those that are relevant in one situation may not be applicable in another. The solutions include viewing the complete relationship, considering the scope of the power to direct and control the work, and documenting each of the factors used to make the determination.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.