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Independent Contractor or Employee?


When hiring people to provide services, business owners must decide whether they will be classified as an independent contractor or an employee.  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 taxes on compensation to independent contractors.  The determination of whether an individual is an employee or independent contractor depends on the facts and circumstances of each particular situation.

According to the IRS website, facts will fall into the following three categories:

1 – Behavioral:  Does the company control or have the right to control what the worker does and how the worker does his or her job?

2 – Financial:  Are the business aspects of the worker’s job controlled by the payer(i.e. how the worker is paid, whether expenses are reimbursed, who provides tools/supplies)

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

Business owners need to weigh each of these factors when making a determination, as there could be facts supporting both arguments. The IRS states that “the keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.”

Visit the following IRS Publication link for five examples specific to the construction industry:

http://www.irs.gov/publications/p15a/ar02.html#en_US_2012_publink1000169502


     

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