Employee or Independent Contractor?

As a small business owner you may hire people as independent contractors or as employees. There are rules that will help you determine how to classify the people you hire. This will affect how much you pay in taxes, whether you need to withhold from your workers paychecks and what tax documents you need to file.

Here are seven things every business owner should know about hiring people as independent contractors versus hiring them as employees.

1. The IRS uses three characteristics to determine the relationship between businesses and workers:
   a. Behavioral control: covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
   b. Financial control: covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
   c. Type of relationship: factors related to how the workers and the business owner perceive their relationship.
2. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
3. If you can direct or control only the result of the work done – and not the means and methods of accomplishing the result – then your workers are probably independent contractors.
4. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.
5. Workers can avoid higher tax bills and lost benefits if they know their proper status.
6. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing form SS-8, determination of worker status for purposes of federal employment taxes and income tax withholding, with the IRS.
7. You can learn more about the critical determination of a worker’s status as an independent contractor of employee at the IRS Publication 15-A

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The List Below Is Taken Off Of The SS-8

Behavior Control

1. What specific training and/or instruction is the worker given by the firm?
2. How does the worker receive work assignments?
3. Who determines the methods by which the assignments are performed?
4. Who is the worker required to contact if problems or complaints arise and who is responsible for their resolution?
5. What types of reports are required from the worker? Attach examples.
6. Describe the worker’s daily routine such as, schedule, hours, etc.
7. At what location(s) does the worker perform services (e.g., firm’s premises, own shop or office, home, customer’s location, etc.)? Indicate the appropriate percentage of time the worker spends in each location, if more than one.
8. Describe any meetings the worker is required to attend and any penalties for not attending (e.g., sales meetings, monthly meetings, staff meetings, etc.).
9. Is the worker required to provide the services personally?
10. If substitutes or helpers are needed, who hires them?
11. If the worker hires the substitutes or helpers, is approval required? If “Yes,” by whom?
12. Who pays the substitutes or helpers?
13. Is the worker reimbursed if the worker pays the substitutes or helpers? If “Yes,” by whom?

Financial Control

1. List the supplies, equipment, materials, and property provided by each party:
   a. The firm
   b. The worker
   c. Other party
2. Does the worker lease equipment? If “Yes,” what are the terms of the lease? (Attach a copy or explanatory statement.)
3. What expenses are incurred by the worker in the performance of services for the firm?
4. List the supplies, equipment, materials, and property provided by each party:
   a. The firm
   b. Other party
5. Type of pay the worker receives: Salary Commission Hourly Wage Piece Work Lump Sum Other (specify) If type of pay is commission, and the firm guarantees a minimum amount of pay, specify amount $ .
6. Is the worker allowed a drawing account for advances? If “Yes,” how often? Specify any restrictions.
7. Whom does the customer pay? Firm or Worker. If worker, does the worker pay the total amount to the firm?
8. Does the firm carry worker’s compensation insurance on the worker?
9. What economic loss or financial risk, if any, can the worker incur beyond the normal loss of salary (e.g., loss or damage of equipment, material, etc.)?

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Relationship

1. List the benefits available to the worker (e.g., paid vacations, sick pay, pensions, bonuses, paid holidays, personal days, insurance benefits).
2. Can the relationship be terminated by either party without incurring liability or penalty? If “No,” explain your answer.
3. Did the worker perform similar services for others during the same time period? If “Yes,” is the worker required to get approval from the firm? Is the worker a member of a union?
4. Describe any agreements prohibiting competition between the worker and the firm while the worker is performing services or during any later.
5. Is the worker a member of a union?
6. What type of advertising, if any, does the worker do (e.g., a business listing in a directory, business cards, etc.)? Provide copies, if applicable.
7. If the worker assembles or processes a product at home, who provides the materials and instructions or pattern?
8. What does the worker do with the finished product (e.g., return it to the firm, provide it to another party, or sell it)?
9. How does the firm represent the worker to its customers (e.g., employee, partner, representative, or contractor)?
10. If the worker no longer performs services for the firm, how did the relationship end (e.g., worker quit or was fired, job completed, contract ended, firm or worker went out of business)?

Service Provider or Salespersons

1. What are the worker’s responsibilities in soliciting new customers?
2. Who provides the worker with leads to prospective customers?
3. Describe any reporting requirement pertaining to the leads.
4. What terms and conditions of sale, if any, are required by the firm?
5. Are orders submitted to and subject to approval by the firm?
6. Who determines the worker’s territory?
7. Did the worker pay for the privilege of serving customers on the route or in the territory? If “Yes,” whom did the worker pay? If “Yes,” how much did the worker pay?
8. Where does the worker sell the product (e.g., in a home, retail establishment, etc.)?
9. List the product and/or services distributed by the worker (e.g., meat, vegetables, fruit, bakery products, beverages, or laundry or dry cleaning services). If more than one type of product and/or service is distributed, specify the principal one.
10. Does the worker sell life insurance full time?
11. Does the worker sell other types of insurance for the firm? If “Yes,” enter the percentage of the worker’s total working time spent in selling other types of insurance.
12. If the worker solicits orders from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments, enter the percentage of the worker’s time spent in the solicitation %
13. Is the merchandise purchased by the customers for resale or use in their business operations? Describe the merchandise and state whether it is equipment installed on the customers’ premises.

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Call Us At 781-556-5554 Or Simply Click/Touch Here And Fill Out The Form At The Bottom Of This Page