Employee? Or Independent Contractor?
Business owners are often faced with the decision to treat workers as either an employee or an independent contractor. The ramifications (both tax and legal) of this decision are far reaching.
The business owner often prefers to treat workers as independent contractors to avoid paying payroll tax and employee benefits to the worker. However, this is not a situation where the taxpayer simply gets to choose what is better for him. A worker is either an employee or an independent contractor based upon the facts and circumstances of the situation.
We know that in reality, this can be a very gray area. Therefore, it is extremely important for any business owner faced with this decision to consider the following factors:
- Do you have a written contract? The IRS and other interested authorities expect to see a contract where there is an independent contractor.
- Do you treat workers who perform the same duties differently? If two workers perform substantially the same work, treating one of those workers as an independent contractor would not look correct.
- Does the worker provide their own tools and supplies? Usually an independent contractor provides their own equipment. If you are providing all that they need to do their work, is it really convincing that they are an independent contractor?
- Do you reimburse the worker for expenses? This can make the worker look like an employee.
- Do you pay the worker by the hour? This also makes the worker look like an employee.
- How much do you supervise the worker? The more you supervise, the more the worker looks like an employee.
- Do you require set hours for the worker? Doing so is a classic example of an employee-employer relationship.
It is important to know that there is not one single factor that will always cause a worker to be classified as an employee. Rather, it is preponderance of these factors that will lead the IRS or other authorities to classify a worker as an employee. Additionally, there are other factors that are also pertinent. So, when engaging workers and determining their worker status, the business owner should seriously consider these and other factors as they relate to their specific situation.