Employee or Independent Contractor?

by Deborah Z Mark

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As a business owner, do you think you will be able to save time and money by classifying workers as independent contractors instead of employees, placing the responsibility on them to report their own taxes?

You may want to give that thought a little more consideration.

It is critical that you correctly determine whether a person providing services is an employee or an independent contractor. If you classify an employee as an independent contractor and you have no reasonable basis for doing so, the IRS may hold you liable for employment taxes and possible penalties for that worker.

Employer Requirements

In general, as an employer you must withhold income taxes, withhold and pay Social Security and Medicare taxes, workers’ compensation, and unemployment tax on wages paid to an employee.

You do not generally have to withhold or pay any taxes on payments to independent contractors. (Remember, as your PEO, managestaff calculates, withholds and pays taxes on your behalf, since we are the employer of record for the employees we lease back to you.)

In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and where and how the worker does his or her job?
  2. Financial:  Are the business aspects of the worker’s job controlled by the payer? (These include things like how and when the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship:  Are there written contracts or employee type benefits (for example, a pension plan, insurance, vacation pay, etc.)? 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 an independent contractor. 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.

If you have questions regarding how to classify your workers, give managestaff a call. We’ll help.

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It’s what we do.

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