In order to tell the difference between a part or full time employee and independent contractor, it is important to consider the three main factors listed below. These factors will determine the responsibilities a business has towards a person who may be providing a service to the business, as well as the rights of both parties involved.
Behavior
A company generally controls an employee’s behavior by deciding where and when a worker should work and how the worker should do the job. Independent contractors, on the other hand, often work from home and may do a job at anytime of the day or night, so long as the job is done before the deadline agreed to by both parties.
Financial Control
Employees are typically compensated for work through a guaranteed wage or salary and are reimbursed for work related expenses. An independent contractor, on the other hand, is usually paid a flat fee for a job. They often have a significant investment in the equipment or tools he or she uses. They are more likely to have unreimbursed expenses. They normally provide their services to multiple clients and customers.
Relationship
Merely having a contract in place is not a safe harbor. The IRS is not required to follow a contract, but rather determine by how the parties work together whether the relationship is an employee vs. independent contractor relationship. Busisnesses generally do not provide benefits, such as health insurance to Independent contractors.
Why is it Important to Know the Difference?
The IRS stipulates that a business is legally obligated to withhold income tax and pay SS, Medicare and unemployment tax on wages paid to each company employee. However, a business does not have to fulfill these obligations when hiring an independent contractor.
A business that misclassifies an employee as an independent contractor can be held liable to pay employment taxes for the worker in question, unless the company has filed a Relief Provisions form under Section 530. Employees who feel that they have been unfairly classified as independent contractors can file Form 8919 to report an employer’s unpaid share of SS and Medicare taxes.
In addition, the distinction will be very important in light of the fast approaching implementaion of the Affordable Care Act, which requires pay or play mandates for those employers with over fifty full time employees.
Every business owner should know the difference between an independent contractor and company employee. The tax professionals at Langdon & Company LLP stand ready to help you with this determination.