The Internal Revenue Service reminds employers to correctly determine whether workers are employees or independent contractors.
Generally, employers must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to employees. Business owners do not generally have to withhold or pay any taxes on payments to independent contractors.
Determining Whether the Individuals Providing Services are Employees or Independent Contractors
Before a business can determine how to treat payments for services, they must first know the business relationship that exists between the business and the person performing the services. The person performing the services may be –
- An independent contractor
- An employee (common-law employee)
- A statutory employee
- A statutory nonemployee
Common Law Rules
Facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the business owner control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the business owner? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits such as pension plan, insurance or vacation pay? Will the relationship continue and is the work performed a key aspect of the business?