Is This An Independent Contractor or Employee ?

Small Business Bookkeeping

Know the Difference Between and Independent Contractor and an Employee:

Failing to categorize an employee correctly is a critical mistake. The consequences can result in the government holding the organization liable for payroll taxes with penalties and interest. The IRS looks at several components whether an individual is an employee or an independent contractor they include:

  • Behavioral.
  • Financial.
  • Type of Relationship.

Behavioral:

Does the company control or have the right to control what the worker does and how the worker does his or her job?*

Financial:

Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) **

Type of Relationship:

Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? ***

Discussion:

As a business owner, it is your responsibility to carefully weigh all of these factors to determine the correct status of the worker. Taking behavioral cues is mentioned on the IRS website as a guideline. Typically the organization can direct the desired outcome they are seeking.

Financial arrangements:

Financial arrangements such as who owns the equipment are important considerations but also if the worker has an LLC and provides invoices rather than time-sheets.

The type of relationship:

The type of relationship is key and subject to challenge in the event a worker is injured on the job or claims unemployment benefits upon being released.

A good practice is to prepare an independent contractor agreement. This document will spell out the worker is an independent contractor who is responsible for their own taxes, tools, and insurance. It is not fail-safe in the event of legal claims but it does show the intent of your organization and how you feel they should be classified. In summary, study the guidelines carefully and do not intentionally classify workers in order to save money.

References: * IRS Website Employee Classifications ** IRS Website Employee Classifications *** IRS Website Employee Classifications

Small Business Bookkeeping