If you are a business owner hiring or contracting with other individuals to provide services, it is important to determine whether the individuals providing services are employees or independent contractors. In making the determination, all information that provides evidence of the degree of control and independence must be considered.
Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. Therefore, an employer-employee relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to result, but also as to details and means.
The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. If you are an independent contractor, you are self-employed. Therefore, your earnings are subject to Self-Employment Tax.
Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.
Common law recognizes three categories of evidence to consider when determining the degree of control and independence:
- Behavioral: Does the company control what the worker does and how the worker does his or her job?
- Financial: How the worker is paid (W2 or Form 1099-MISC), whether expenses are reimbursed, who provides tools/supplies?
- Type of Relationship: Are there written contracts or employee benefits (such as pension plan, insurance, vacation pay)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. If, after reviewing the three categories of evidence, you are still unclear whether a worker is an employee or an independent contractor, you can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status.
If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker.