Employee – Black’s Law Dictionary describes an employee as “A person in the service of another under any contract of hire, express or implied, oral or written, where the employer has the power or right to control and direct the employee in the material details of how the work is to be performed.” The IRS has developed a list of factors that indicate whether a worker is an employee. Some of them include:
- A person is required to comply with another person’s instructions about when, where and how he or she is to work.
- Training is provided.
- Integration of the worker’s services into the business operations of the person for whom services are performed.
- The person for whom the services are performed has the right to hire, supervise and pay assistants.
- A continuing relationship.
- The person for whom the services are performed has the right to set hours.
- Work is performed on the premises of the person for whom the services are performed.
- The services are performed in an order or sequence set by the person for whom the services are performed.
- Payment is made by the hour, week or month.
- The person for whom the services are performed pays business or travel expenses. The person for whom the services are performed furnishes equipment or materials.
- The person for whom the services are performed has the right to discharge.
- The worker has the right to terminate his or her relationship with the person for whom the services are performed, at any time and without incurring liability.
For individuals classified as employees, the employer is required to withhold federal and state income taxes, Social Security and Medicare taxes, and must pay for workers compensation and unemployment. To ensure the organization complies with all necessary withholdings, a payroll service is recommended.
Independent Contractors
An independent contractor is a worker who contracts with an employer to provide specialized or requested services on a project or as-needed basis. The IRS defines an independent contractor as someone for whom the employer has the right to control or direct only the result of the work and not the means and methods of accomplishing the result.
The employer is not required to withhold the independent contractor’s federal and state income taxes and doesn’t have to pay Social Security and Medicare taxes for an independent contractor. Also, the employer doesn’t pay workers’ compensation or make contributions to the state unemployment fund or pay the federal unemployment tax. Independent contractors are paid only for time spent working and are responsible for their own health insurance and retirement plans.
If an employer incorrectly classifies a worker as an independent contractor, there can be serious legal and tax repercussions. The IRS provides a test that helps to classify whether a worker is an employee or an independent contractor. This test considers three categories of factors:
- Behavioral: Does the company 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 payer? (These include how the worker is paid, whether expenses are reimbursed, who provides tools and supplies, etc.)
- Type of Relationship: Are there written contracts of employee benefits (retirement plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
There is no set number of factors that “makes” the worker an employee or an independent contractor, and there is no one factor that stands alone in making this determination. It is important to note that the IRS assumes that a worker is an employee. If you are unsure whether to classify a worker as an independent contractor or employee, you can file IRS Form SS-8 to request a determination.
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