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Employee vs. Independent Contractor
2016 © BDS Accounting & Tax - Gladstone Missouri Z3
Employee or Independent Contractor: Question: “I hire people periodically for special projects. When can I hire someone as an independent contractor versus an employee?” Many companies would prefer to hire some, or even all, of their workers as “independent contractors.” When an independent contractor provides a service or product, the service recipient does not have to withhold employment taxes, pay social security taxes (FICA), or pay unemployment tax. However, the category into which the workers fit is determined by the conditions under which they work and the kind of work they do. You may not simply select a category and define them as you desire. The list that follows gives 20 factors or “tests” used by the IRS when determining whether a person is an employee or and independent contractor. The question of “Who controls the details?” appears to be the primary basis on which the determination is made. Actual instruction or direction of worker. A worker who is required to comply with instructions about when, where and how to work is ordinarily an employee. The instructions may be in the form of manuals or written procedures that show how the desired result is to be accomplished. Training of a worker by an experienced employee working with him by correspondence, by required attendance at meetings and by other methods is a factor indicating control by the employer over the particular method of performance. Integration of the person’s services in the business operations generally shows that he is subject to direction and control. If the services must be rendered personally, it indicates an interest in the methods, as well as the results. Lack of control may be indicated when the person has the right to hire a substitute with the permission or knowledge of the employer. Hiring, supervising, and payments to assistants on the same job as the worker generally show employer control over the job. The existence of a continuing relationship between an individual and the person for whom he performs services tends to indicate an employer-employee relationship. The establishment of set hours of work by the employer bars the worker from being master of his own time, which is the right of the independent contractor. Full-time work required for the business in indicative of control by the employer since it restricts the worker from doing other gainful work. Doing the work on the employer’s premises implies employer control, especially where the work is of such a nature that it could be done elsewhere. If the order of the performance of services is, or may be, set by the employer, control by the employer may be indicated. The submission of regular oral or written reports indicates control since the worker must account for his actions. If the manner of payment is by the hour, week or month, an employer-employee relationship probably exists; whereas, payment on a commission or job basis is customary where the worker is an independent contractor. Payment of the worker’s business expenses by the employer indicates control of the worker. The furnishing of tools, materials, etc., by the employer indicates control over the worker. A significant investment by the worker in facilities used by him in performing services for another tends to show an independent status. The possibility of a profit or loss for the worker as a result of his services generally shows independent contractor status. Work for a number of persons at the same time often indicates independent contractor status because the worker is usually free, in such cases, from control by any of the firms. The availability of services to the general public usually indicates independent contractor status. The right of discharge is that of an employer. An independent contractor, on the other hand, cannot be “fired” without incurring liability if he is producing a result that measures up to his contract specifications. The right to quit at any time without incurring liability indicates an employer-employee relationship. Authored by: Jeanne Dau, Director, Chillicothe Satellite Center, Missouri Small Business Development Centers Date Reviewed: 6/22/07 IRS Circular 230 Notice:  Unless expressly stated otherwise in this transmission, any tax advice contained herein, forwarded with or attached to this message was not and is not intended to be used, nor may it be relied upon or used, by any taxpayer for the purpose of (1) the avoidance of any tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions, or (2) promoting, marketing or recommending to another party any tax transaction or tax-related matters that may be addressed herein.
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