Employee vs Independent Contractor

If you engage the services of someone to work in your business, it is very important that you do not misclassify him or her as an independent contractor, if they indeed should be an employee.

An independent contractor is a person in business for his or herself. This means they will usually be working for others besides you, provide their own tools, make their own hours (within guidelines you set), hire their own assistants to do the job, and can reasonably be expected to have a loss on the job if something goes wrong. They are also responsible for paying their own taxes, and cannot be provided tax-free fringe benefits by the people they work for.

If you can tell an employee not just WHAT has to be done, but also HOW, WHEN, WHERE and HOW to do it, you are likely dealing with an employee. If the person must perform the services personally, you have an employee. If you provide a workplace, tools, supplies, training, benefits, helpers, etc., you are likely their employer. If anyone else in your business does essentially the same thing, under the same conditions, and are an employee (or was), your new worker is likely an employee too. And this is regardless of what the two of you have "agreed" to, or what you call yourself on your contract.

The rather subjective conditions to determining who is an employee under the common law rules is spelled out in a "20 Factor Test" explained in IRS Publication 535. Form SS-8 is a questionnaire based on this test, and you or the worker can fill this out and ask the IRS for a determination. (However, since the test is rather subjective, the IRS will generally call the person an employee unless it is VERY clear that they cannot possibly be an employee based on the facts and circumstances.)

Employee status can also be determined, in part, by statutory rules (certain trades are, by definition, an employee or not an employee), widespread industry practices, and the facts and circumstances surrounding the specific situation. If you have a situation that is difficult to call, you would be wise to get the advice and guidance of an experienced tax professional.

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