If you are a business owner hiring or contracting with other individuals to provide services, you must determine whether the individuals providing services are employees or independent contractors.
As a business owner, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay Federal and state unemployment tax on wages paid to an employee. You do not have to withhold and pay any taxes on payments to independent contractors.
To make a determination, you must know the business relationship that exists between you and the person performing the services. In determining whether the person performing the services is an employee or independent contractor, all information that provides evidence of the degree of control and independence must be considered.
Facts that provide evidence of the degree of control and independence fall into three categories:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his/her job? Generally, if the answer is yes, the person will be classified an employee.
Financial: Are the business aspects of the worker's job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provided tools and supplies, etc.) Generally, if the answer is yes, the person will be classified an employee.
Type of Relationship: Are there written contracts or employee type benefits, and will the relationship continue? Generally, if the answer is yes, the person will be classified as an employee.
The keys are to look at the entire relationship, and to consider the degree of control or extent of the right to direct and control, and finally, to document each of the factors used in coming up with a determination.
If a business owner is unclear whether a worker is an employee or independent contractor, they can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding with the IRS. The IRS will review the facts and circumstances and officially determine the worker's status.
This article was written by Donald M. Scherzi, CPA, CFP, LLC
Mike Lupo, SCORE Counselor
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