How a person is paid has a relationship to the employee vs. salary; An implied or written contract, and; Control of the person's work by the employer pay and whether the employee and employer must pay FICA taxes (for. If your actions show an employer-employee relationship, then your workers are their relationship (e.g., employee benefits, written contracts/intent of parties, . However, you must withhold and pay FICA taxes and, in the case of drivers and. An independent contractor is a natural person, business, or corporation that provides goods or services to another entity under terms specified in a contract or within a Greater integration favors an employee-employer relationship. The permanence of the . An employee only pays the employee portion of the FICA tax.
The IRS says that the absence of this factor does not necessarily negate an employee relationship. Do you have the right to set the order in which services are performed, whether or not you exercise that right? Do you require the worker to give you written or oral reports? Hourly, weekly or monthly pay.
Do you pay the person by the hour, week or month? A worker might still be an independent contractor and be paid on this basis. Contractors tend to be paid by the job or on straight commission, but could be paid monthly or weekly so as to spread out contract payments.
Do you provide the worker with tools or materials? Do you have the right to fire the worker?
There can be a tricky distinction between controlling workers via the threat of firing if they do not follow your instructions — which would indicate employee status —and having the right to terminate a contract because the contractor has not performed according to specifications.
Can the worker quit at any time?
The Misclassification of Independent Contractors: A Costly Mistake | Doherty
Does the worker have a significant investment in equipment or facilities that are not typically maintained by employees? Can the worker incur a profit or loss as a result of his or her work in addition to the profit of payment for the work? A contractor should bear an economic risk over and above the risk of not being paid. More than one job. Does the worker work for more than one business at a time? Note, however, that the IRS says that a worker could be an employee of numerous service recipients.
Services available to general public.
IRS 20 Factors for Determining Employee Status
Does the worker offer services to the general public on a regular basis? Motivation For Classification of Workers as Independent Contractors Due to perceived cost savings, companies have embraced the use of temporary workforces such as independent contractors. A temporary workforce can offer flexibility in workforce size, decrease contributions to employment taxes and employee benefits plans, and reduce obligations and expenses related to labor law.
As more companies have chosen to move some of their workload to independent contractors, it is important for hiring managers and workers to gain an understanding of the legal distinction between employees and contractors and the potential risks involved in using independent contractors. Characteristics of an Employee Employees devote substantially all of their work time to one employer.
They rely on the employer for work direction, are paid on an hourly or salary basis, are paid for any expenses incurred out of pocket on behalf of their employment and get their training from the employer. An employee cannot lose money by being employed.
Characteristics of an Independent Contractor An independent contractor would not normally devote their full time efforts to one employer. They should not be paid on an hourly or salary basis, but instead should be paid on a project basis.
These independent contractors should not receive company benefits medical, dental, vacation, pension, etc. The IRS uses a point test to determine if a person can be classified as an independent contractor. They look at the relationship of the person to the company using the points above to make the determination.
Various state agencies use similar criteria to determine if a relationship between a worker and a company can pass muster as an independent contractor. Unfortunately, the employer would have no rights to recover from the employee what is due to the IRS.
IRS 20 FACTORS FOR DETERMINING EMPLOYEE STATUS
If an employer has not filed any information returns, such as the Formthat were required, the percentage amounts are doubled. Additionally, the employer would still be liable for its share of FICA and unemployment taxes. Intentional Misclassification Intentionally misclassifying an employee could result in the following employer liabilities - The full amount of income tax that should have been withheld with an adjustment if the employee has paid or does pay part of the tax - The full amount of both the employer and employee share for FICA but might receive an offset if the employee paid FICA self-employment taxes - Interest and penalties, computed on far larger amounts than in the case of an unintentional misclassification.
As many organizations have already discovered, the cost of misclassifying workers can be staggering. Protecting Your Company The definition of who is an independent contractor can vary not only between different states but also by different state agencies within the same state. And, remember, the IRS generally assumes a worker is an employee unless companies can prove they are not.
Given the magnitude of the adverse consequences that can be linked to misclassification of workers, a compliance system is vital, especially in organizations with a large workforce. Some companies try to protect themselves with written contracts claiming the contractor's independence from the company.