Employee or Independent Contractor? Business Matters
itemed by Administrator (admin) on May 24 2009 at 9:04 PM
RockRidge Financial Blog >> Business Matters

Employee or Independent Contractor? Recognizing the difference and handling matters properly begins with defining the two categories of workers (employee or independent contractor). In determining whether a worker is an employee or an independent contractor, factors to take into consideration include the type of behavioral and financial control exercised over the worker, as well as the type of relationship between the parties. The distinction is critical, because if a worker is an independent contractor, he or she is fully liable for taxes, whereas a business shares tax liabilities with workers classified as employees. There is “no magic formula” to be applied, and the entire relationship between the worker and the company needs to be evaluated, focusing on the extent of control and direction exercised over the worker.

“Behavioral control” looks at whether the employer has the right to direct and control how the task is to be done. Factors to consider include whether the company may tell the employee when and where to report, and if the company may direct the sequence of work to be done. More detailed instructions on how to perform the job support a finding that the worker is an employee, and not an independent contractor.
 
Here is an example: A plumber is hired to do work at a new warehouse. If the plumber reports to the job site, is given the building plans, and told he has five days to complete his work, he should be classified as an independent contractor. However, if that same plumber, working through a union hiring hall, reports to the job site and is not only given the building plans, but is told (a) what size pipe to use, (b) the sequence in which he is to perform the tasks, and (c) is provided the tools necessary to the complete the work, then he should be classified as an employee.
 
“Financial control” considers such factors as the amount of investment by the worker, whether the worker incurs unreimbursed expenses, if there is an opportunity for profit or loss, and whether the worker's services are available to others in the market. An independent contractor generally has a significant investment in tools, materials, etc. The method of payment is also a factor in determining the proper classification for the worker. A flat-fee arrangement generally supports a finding that the worker is an independent contractor, whereas a weekly, biweekly, or monthly amount is generally more indicative of a finding that the worker is an employee.
 
“Type of relationship” looks at such issues as whether there is a written contract between the parties, whether the worker receives employee benefits, and the permanency of the relationship. It is also important to consider whether the services provided by the worker are part of the company's key activities.
 
IRS Forms: If, after going through the above analysis, an employer still is not sure how to classify a worker, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, should be filed. The form can be filed by either the worker or the business. He added that this should be done as quickly as possible, as the IRS takes at least six months to process the form.
 
If the IRS determines that the worker is an employee, Form 8919, Uncollected Social Security and Medicare Tax on Wages, can be filed with Form 1040, so that the employee only reports his or her share of applicable payroll taxes. The form requires the employee to check one of the enumerated reasons as to why he or she is an employee and not an independent contractor. Some, but not all, of the reasons on Form 8919 require that Form SS-8 be filed first.

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