So what constitutes an independent contractor versus an employee?
Obviously health insurance and payroll taxes are key indicators but the IRS has a little more guidance on making the determination. It may seem trivial that if you're not paying health insurance, paid time off or payroll taxes than it must be an independent contractor but use caution; an independent contractor could challenge that they were in fact an employee and you could be liable for hefty back-due taxes and penalties!
So what does the IRS state? There are 3 categories to consider:
*Behavioral Control - You (the business owner) have "the right to direct or control the work performed by the worker." Simply put do you have the authority to tell the worker what they need to do and how they need to complete the task or simply what you need done? Reminder, it's about having the authority to dictate regardless of whether or not you exercise that right.
*Financial Control - Do you have control over the financial aspects of the workers job? For example, do you provide their equipment; are they able to work for others (particularly competitors) or only your business and how do you pay them?
*Relationship - What contracts do you have in place? Do you provide benefits or paid time off? What is the term of the hire; is it indefinitely or upon completion of a task? This category has the most room for interpretation and should not hold much significance in making the determination.
If you need additional guidance feel free to email or call us for assistance. More information is also available at the IRS website.
Also visit our free document page for important documents for both new employees and contractors. Remember, W9s get a 1099; W4s work "4" you!
