EMPLOYEE OR INDEPENDENT CONTRACTOR?

Significance of this Distinction

Employers should understand the difference between an employee and an independent contractor. If you are an employee, your employer must withhold income tax and your portion of social security and Medicare taxes. Also your employer is responsible for paying social security, Medicare and unemployment (FUTA) taxes on your wages. Your employer must give you a Form W-2, Wage and Tax Statement, showing the amount of taxes withheld from your pay. If you are an independent contractor, the business may be required to give you Form 1099-MISC, Miscellaneous Income, to report what it has paid you.

How to Distinguish an Employee from an Independent Contractor

If an employer-employee relationship exists, it does not matter what it is called. The facts will drive the determination. The law will generally find an employer-employee relationship where the following relevant factors apply:

1. Instructions - Employee has the right to control how the work results are achieved (when &how)

2. Training - Employer trains the individual to perform work

3. Integration - Individual’s services are integrated into the employer’s business operation

4. Personal Service - Individual’s render services to the employer personally

5. Hiring Assistants - Employer hires, fires and pays other employees who work with and/or assist the individual

6. Relationship - Individual has a continuing relationship with the employer, including recurring, irregular intervals

7. Hours of Work - Employer establishes hours of work

8. Required Hours - Employer requires the individual to work full time

9. Work on Premises - Individual works on the employer’s premises or at a location designated by the employer

10. Order of Duties - Employer prescribes the order or sequence of the individual’s duties

11. Reports - Individual is required to submit reports to the employer

12. Payment - Individual is paid by the hour, week, month, etc. rather than by the job or on commission

13. Expenses - Individual’s business and travel expenses are paid or reimbursed by the employer

14. Tools/Materials - Employer furnishes tools, equipment, materials, etc. required to do the job

15. Investment - Individual has no significant investment in facilities/equipment used to perform services

16. Profit or Loss - Individual is not subject to profits or losses from services rendered to employer

17. Employment - Individual is not free to perform services for more than one unrelated employer at the same time

18. Availability - Individual’s services are not generally available to the public except through the employer

19. Right to Fire - Individual’s services can be terminated by the employer

20. Right to Quit - Individual can terminate his/her employment for the employer without regard to breach of contract

Source: IRS Publication 1779 and other IRS publications