Employers frequently confuse the terms “employee” and “independent contractor.” They assume that they can choose how they classify a person who does work for them. One reason some businesses may try to classify workers as independent contractors when, in fact, the IRS would treat them as employees, is because it’s cheaper. According to the IRS, three criteria must be weighed which involve behavioral, financial and ongoing relationship considerations. (SOURCE: eHow.com)
Employee OR Independent Contractor?
Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. Are they an Independent Contractor or an Employee?
Employee (Common-Law Employee)
Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed. (SOURCE: IRS – Common-Law Employee Defined).
Independent Contractor (Self Employed)
Individuals who offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. (SOURCE: IRS – Independent Contractor Defined)
Common Law Rules
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?
The Risks of Employee Misclassification
Although a contract may state that the worker is an employee or an independent contractor, this is not sufficient to determine the worker’s status. The IRS is not required to follow a contract stating that the worker is an independent contractor, responsible for paying his or her own self employment tax. How the parties work together determines whether the worker is an employee or an independent contractor.
If the IRS determines that a worker has been misclassified and payroll taxes should have been withheld, the employer will be liable for those back taxes as well as penalties. The IRS is very aggressive about enforcing this law. (SOURCE: IRS Website)
The SIMPLE SOLUTION
Call Outstaffing to discuss the particulars of your situation and determine if your worker should be an employee. If so, Outstaffing can provide you a simple, affordable solution to employ your worker correctly under a co-employment agreement.
1-888-OUTSTAFF (1-888-688-7823)
