Independent contractor or employee? Some business owners try to categorize as many of their workers as possible as the former rather than the latter. That’s because contractors are not covered by unemployment and workers’ compensation, or by federal and state wage, hour, anti-discrimination and labor laws. In addition, businesses do not have to pay federal payroll taxes on monies paid to independent contractors.
However, misclassifying a worker can land a business owner in hot water with the Internal Revenue Service (IRS) or state regulators, so business owners should pay special attention to the difference between independent contractors and employees and know which category the person hired falls into.
The IRS considers the following in classifying workers:
— What instructions the employer gives the worker about when, where, and how to work. The more specific the instructions and the more control exercised, the more likely the worker will be considered an employee.
— What training the employer gives the worker. Independent contractors generally do not receive training from an employer.
— The extent to which the worker has business expenses that are not reimbursed. Independent contractors are more likely to have unreimbursed.
— The extent to which the worker makes services available to other employers. Independent contractors are more likely to make their services available to other employers.
— How the business pays the worker. An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job.
— Whether there are written contracts describing the relationship. Independent contractors generally sign written contracts stating that they are independent contractors and setting forth the terms of their employment. They are usually hired for a set time period.
— Whether the business provides the worker with employee benefits, such as insurance, a pension plan, vacation pay, or sick pay. Independent contractors generally do not get benefits.