Employee vs. Independent Contractor

The Internal Revenue Service is cracking down on companies that do not classify employees correctly.  This area seems to be gray to a lot of people, but if you look closely there are strict guidelines that should be adhered to.  You may ask why the confusion or why would a company try to avoid classifying an individual as employee and would rather classify them as an independent contractor?  The answer is TAXES!  That's right, the employer is responsible for matching the social security and medicare taxes on each employee's wages plus pay the federal and state unemployment taxes on these wages as well.  If an individual is deemed to be an independent contractor, the taxes become their responsibility.  The company is only responsible for issuing a 1099 stating the gross amount paid during the previous year. 

So what exactly distinguishes an employee from an independent contractor?  Don't let the term "contractor" fool you.  This does not imply what comes to mind for the construction industry.  An independent contractor is anyone that you pay for services rendered that is not an employee. 

 The IRS uses three characteristics to determine the relationship between businesses and workers: 

• Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
• Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job. 
• Type of Relationship factor relates to how the workers and the business owner perceive their relationship. 

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.

If you can direct or control only the result of the work done -- and not the means and methods of accomplishing the result -- then your workers are probably independent contractors.

Failure to classify workers correctly can cause penalties and interest due.  If you have questions regarding the classifications of your workers please review information at IRS.GOV.