As a business owner it’s imperative for you to correctly determine whether individuals providing services to you are employees or independent contractors.
For employees you usually must withhold income taxes withhold and pay Social Security and Medicare taxes and pay unemployment tax. However you do not generally have to withhold or pay taxes on payments to independent contractors.
Here are the first 10 steps the IRS uses to help you determine if an individual is considered a contractor or an employee. Look for the final 10 steps in Thursday’s blog.
- An Employee receives instructions about when where and how the work is to be performed.
- An Independent Contractor does the job his or her own way with few if any instructions as to the details or methods of the work.
- Employees are often trained by a more experienced employee or are required to attend meetings or take training courses.
- An Independent Contractor uses his or her own methods and thus need not receive training from the purchaser of those services.
- An Employee’s work is normally integrated into the business operations. This shows the worker is subject to direction and control.
- An Independent Contractor usually does not become part of everyday business operations.
4. SERVICES RENDERED PERSONALLY:
- An employee’s services must be rendered personally; employees do not hire their own substitutes or delegate work to them.
- A true Independent Contractor is able to assign another to do the job in his or her place and need not perform services personally.
5. HIRING SUPERVISING & PAYING A HELPER:
- An Employee may act as a foreman for the employer but if so helpers are paid with the employer’s funds.
- Independent Contractors select hire pay and supervise any helpers used and are responsible for the results of the helpers’ labor.
6. CONTINUING RELATIONSHIP
- A continuing relationship between the worker and the person for whom the services are performed indicates an employee-employer relationship.
- An independent contractor has a contract that details the start date and end date of the relationship.
7. SET HOURS OF WORK:
- An Employee may work “on call” or during hours and days as set by the employer.
- A true Independent Contractor is the master of his or her own time and works the days and hours he or she chooses.
8. FULL TIME REQUIRED:
- An Employee ordinarily devotes full-time service to the employer or the employer may have a priority on the Employee’s time.
- A true Independent Contractor cannot be required to devote full-time service to one firm exclusively.
9. LOCATION WHERE SERVICES PERFORMED:
- Employment is indicated if the employer has the right to mandate where services are performed.
- Independent Contractors ordinarily work where they choose. The workplace may be away from the client’s premises.
10. ORDER OR SEQUENCE SET:
- An Employee performs services in the order or sequence set by the employer. This shows control by the employer.
- A true Independent Contractor is concerned only with the finished product and sets his or her own order or sequence of work.