In determining whether the person providing service is an
employee or an independent contractor, all information that provides
evidence of the degree of control and independence must be
considered.
It is critical that you, the employer, correctly determine
whether the individuals providing services are employees or
independent contractors. Generally, you must withhold income taxes,
withhold and pay Social Security and Medicare taxes, and pay
unemployment tax on wages paid to an employee. You do not generally
have to withhold or pay any taxes on payments to independent
contractors.
Caution: If you incorrectly classify an employee
as an independent contractor, you can be held liable for employment
taxes for that worker, plus a penalty.
Who is an Independent Contractor?
A general rule is that you, the payer, have the
right to control or direct only the result of the work
done by an independent contractor, and not the means and
methods of accomplishing the result.
Example: Steve Smith, a computer programmer,
is laid off when Megabyte Inc. downsizes. Megabyte agrees to pay
Steve a flat amount to complete a one-time project to create a
certain product. It is not clear how long it will take to complete
the project, and Steve is not guaranteed any minimum payment for
the hours spent on the program. Megabyte provides Steve with no
instructions beyond the specification for the product itself.
Steve and Megabyte have a written contract, which provides that
Steve is considered to be an independent contractor, is required
to pay Federal and state taxes, and receives no benefits from
Megabyte. Megabyte will file a
Form
1099-MISC (PDF). Steve does the work on a new high-end
computer which cost him $7000. Steve works at home and is not
expected or allowed to attend meetings of the software development
group. Steve is an independent contractor.
Refer to the page on
Paying Independent Contractor if you need
information on what your responsibilities are when paying
contractors.
Who is a Common-Law Employees (Employee)?
Under common-law rules, anyone who performs services for
you is your employee is 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.
To determine whether an individual is an employee or independent
contractor under the common law, the relationship of the worker and
the business must be examined. All evidence of control and
independence must be considered. In an employee-independent
contractor determination, all information that provides evidence of
the degree of control and degree of independence must be considered.
Facts that provide evidence of the degree of control and
independence fall into three categories: behavioral control,
financial control, and the type of relationship of the parties.
Refer to Publication 15-A,
Employer's
Supplemental Tax Guide for additional information.
Who is an Employee?
A general rule is that anyone who performs services for you
is your employee if you can control what will be done
and how it will be done.
Example: Donna Lee is a salesperson employed
on a full-time basis by Bob Blue, an auto dealer. She works 6 days
a week, and is on duty in Bob's showroom on certain assigned days
and times. She appraises trade-ins, but her appraisals are subject
to the sales manager's approval. Lists of prospective customers
belong to the dealer. She has to develop leads and report results
to the sales manager. Because of her experience, she requires only
minimal assistance in closing and financing sales and in other
phases of her work. She is paid a commission and is eligible for
prizes and bonuses offered by Bob. Bob also pays the cost of
health insurance and group-term life insurance for Donna. Donna is
an employee of Bob Blue.
Statutory Employees
If workers are independent contractors under the common law
rules, such workers may nevertheless be treated as employees by
statute ( statutory employees ) for certain employment tax purposes
if they fall within any one of the following four categories and
meet the three conditions described under Social security
and Medicare taxes , below.
