Your small business is booming, and you decided it’s finally time to hire someone. Congratulations!
Do you know whether to classify your new worker as an independent contractor or an employee? In order to avoid any errors on your taxes, you’ll want to become familiar with some terms:
An Independent Contractor is a business owner or contractor who provides services to other businesses.
An Employee is anyone who performs services where the ‘Employer’ can control what will be done and how it will be done. This is so even when the employee has freedom of action. What matters is that the ‘Employer’ has or reserves the right to control the details of how the services are performed.
Facts that provide evidence of the degree of control and independence fall into three categories:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: 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?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
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 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