Employee or Independent Contactor

It is crucial for employers to correctly categorize service providers as employees or independent contractors.  It’s especially true for small businesses because they don’t often have the systems in place to correctly determine if a service provider is an employee or independent contractor.  Also the consequences of an incorrect categorization can be a large financial burden for a small business.

The determination is crucial because if the service provider is an employee, the business is obligated to withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee.  Those obligations do not exist when the service provider is an independent contractor.

The determination of whether a service provider is an independent contractor or an employee is based on the facts and circumstances of the situation.

Generally the IRS looks at the control and the financial and contractual relationship between the business and the service provider.  Questions to consider are:

• What degree of control does the service provider exercise?  Can he set his own hours, work at a different location if necessary, provide his own tools, etc.
• How is the service provider paid?  By the hour, on delivery, or weekly retainer?  Are expenses reimbursed?
• Is there a written contract in place?  What other benefits, if any, is the service provider entitled to?

There are no magic set of facts that, when in place, “pre-qualifies” a service provider as an employee or independent contractor.  If you have a doubt, seek the advice of a tax professional knowledgeable in the IRS rules relating to employee vs. independent contractor status.

If you are a business owner who needs advice regarding employee vs. independent contractor status of some of your service providers, then schedule your free consultation by calling (480) 888-7111 or submit a web request here.