The IRS has defined the diference between an employee and independent contractor. It is very important to understand the difference as each is handled differently for taxes and filing. This article will assist with an overview of how to determine who is an employee and who is an independent contractor. Please note, you should still speak with your accountant/tax professional or IRS to confirm.
Determining Whether the Individuals Providing Services are Employees or Independent Contractors
The first thing you must determine is the business relationship the individual performing the services has:
- 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. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.
- You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done).
- For more information please visit the IRS website - IRS - Independent Contractor
- 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.
- For more information please visit the IRS website - IRS - Employee (Common-Law Employee)
Common Law Rules
Facts that provide evidence of the degree of control and independence fall into three categories:
: Does the company control or have the right to control what the worker does and how the worker does his or her job?
: 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?
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, after reviewing the three categories of evidence, it is still unclear whether a worker is an employee or an independent contractor, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) can be filed 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.
Be aware that it can take at least six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form SS-8 (PDF).
Independent Contractor (Self-Employed) or Employee?