IRS Definition of Independent Contractor vs. Employee

  • BR Accounting And Tax Service

Categories: Business Taxes , Payroll Services , Worker Classifications

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There is an age old question out there about whether or not you should or are required to pay your workers as employees, rather than an independent contractor. The debate exists primarily due to what  our friends in the Government Contracting sector refer to as “fringe benefits”. Although this language can be accredited to Government Contracting, all employers pay fringe benefits, whether they think of it as such or not. To clarify, all employers must match their employees’ FICA withholding, as well as pay both FUTA and SUI, and in most circumstances worker’s compensation insurance for those same employees. This amounts to approximately 10% additional expense on top of the employees’ salaries.

Let’s get into the IRS’s definitions of how to classify workers.

Worker Classification 101: employee or independent contractor

A business might pay an independent contractor and an employee for the same or similar work, but there are key legal differences between the two. It is critical for business owners to correctly determine whether the people providing services are employees or independent contractors.

Here's some information to help business owners avoid problems that can result from misclassifying workers.

An employee is generally considered anyone who performs services, if the business can control what will be done and how it will be done. What matters is that the business has the right to control the details of how the worker's services are performed. Independent contractors are normally people in an independent trade, business or profession in which they offer their services to the public.

Independent contractor vs. employee

Whether a worker is an independent contractor, or an employee depends on the relationship between the worker and the business. Generally, there are three categories to consider (PDF).

  • Behavioral control − Does the company control or have the right to control what the worker does and how the worker does the job?
  • Financial control − Does the business direct or control the financial and business aspects of the worker's job. Are the business aspects of the worker's job controlled by the payer? Things like how the worker is paid, are expenses reimbursed, who provides tools/supplies, etc.
  • Relationship of the parties − Are there written contracts or employee type benefits such as pension plan, insurance, vacation pay? Will the relationship continue and is the work performed a key aspect of the business?

Should you need help with your classifications of workers, want to participate in voluntary disclosure, or find yourself (and your business) in the mist of an IRS Audit, just remember we’re here to help you with all of your tax preparation, resolution/representation needs.  Now and in the future. Don’t put off addressing potential or current tax situations. Feel free to contact us w