The issue of independent contractor vs. employee can be summed up to who pays the taxes and whether you, as an employee, are responsible for withholding them. To be able to tell whether someone you have hired is an independent contractor or an employee, you must ascertain certain factors regarding your relationship with the worker.
These factors are:
- Behavioral: does the company control or have final say in how the worker performs his job?
- Financial: Are the business expenses of the worker’s job reimbursed by the payer? (this includes payment mode, who provides tools/supplies and so on)
- Type of Relationship: Is there a written contract in place? Do you provide benefits to the worker (insurance, vacation plan, 401K, etc.) Does this relationship end when the performed work is completed?
When you’re looking at these factor, don’t forget the nature of the job and how the job fits in with the rest of the industry. This guide will help you determine the role of a worker. As a rule of thumb, the more control you have over a worker, the more likely that he is your employee.
Ask yourself these questions:
- Do you establish when and where the person works?
- Does the worker use his equipment or yours?
- Is the worker able to hire other people to finish the job without your approval?
- Does the worker purchase his own supplies or services or do you?
- Do you establish what specific tasks must be done by a specific worker?
- How much guidance do you provide the worker for completing a task?
- Do you pay him a flat fee or an hourly rate?
- Do you provide benefits such as health insurance, vacations or paid time off?
- Do you reimburse the worker for expenses that were incurred during the job?
- Does the worker perform the same services for others?
- Is there a written agreement with the person regarding the job that is to be done?
- When the job is completed, does the person continue to work for you or is he free of any obligation?
- Is the work performed an integral aspect of your business?
By answering the above questions you will be able to determine the level of control you have over a worker and thus establish if you’re hiring an employee or an independent contractor. Don’t forget though that you must look at your industry as whole to correctly determine these factors. For example, it’s more common for trade workers who are employees to use their own equipment than it is for office workers. You have to look at all the factors to ascertain whether you have to withhold taxes for a worker or not.
Other factors may indicate a high level of control even though the person you are hiring is an independent contractor. Take plumbers for example. If you’re remodeling your house and you hire one to install new fixtures, you will generally agree to have the work done at a certain place and at a certain time. You pay him an hourly rate and reimburse him for any expenses that occur. All these factors show a high degree of control but ultimately it is the worker who performs the job and thus controls the process. This is why he is an independent contractor and not an employee.
Consult IRS publication 15a or contact me if you’re unsure whether a worker you have hired is an independent contractor or an employee.