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Employee vs Independent Contractor?

Submitted by admin on Mon, 8/30/2010 - 12:00 am

Most small business owners often wonder if they can hire someone as an “independent contractor”, or should they be an “employee”. There are obvious benefits from a tax perspective to hiring an “independent contractor”, but be careful, many small businesses walk a fine line or skirt the issue, potentially leading to nasty situation with the IRS when an “independent contractor” decides to file a Form SS-8 with the IRS to redetermine their status as an “employee” or “independent contractor”.

Here are some tips the IRS uses to classify a worker, and every business owner should know them:

  1. The IRS will use three characteristics to determine the relationship between the business and the worker; Behavioral Control, Financial Control, and the Type of Relationship. Behavioral Control addresses whether the business has the right to direct or control how the work is done through instructions, training, or other means. Financial Control addresses whether the business has the right to direct or control the financial and business aspects of the worker’s job. Type of Relationship addresses how the workers and the business owner perceive their relationship.
  2. If you have the right to control or direct not only what is to be done, but also, how it is to be done, then your workers are most likely employees.
  3. If you can direct or control only the result of the work done, and not the means and methods of the process to achieve the result, then your workers are probably independent contractors.
  4. Employers who misclassify workers as independent contractors can end up with substantial tax bills, and face penalties for failing to pay employment taxes and failing to file required tax forms.
  5. Workers can avoid higher tax bills and lost benefits if they know their proper status.
  6. Both employers and workers can ask the IRS to make this determination on their worker status for them by filing a Form SS-8, Determination of Worker Status, with the IRS.

You can learn more about determining worker status as on independent contractor or employee on the IRS website here.

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