Must
I withhold employment taxes on "independent contractors"?
If a worker is an independent contractor, the employer is not
required to withhold or to pay employment taxes (although you
may be required to issue a Form 1099 to the worker and to submit
the Form 1099 to the IRS.)
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a Tax Attorney Now
What
if I make a mistake?
If
you improperly characterize a worker as an independent contractor
and the IRS later reclassifies said worker as an employee, the
results can be devastating. You will probably owe the IRS an
amount equal to approximately 35% of that paid to the worker.
Moreover, even if you operate your business as a corporation,
you may end up with personal liability for the taxes. Finally,
in addition to employment taxes, you may also be liable to the
worker for employee benefits such as pension plan and medical
insurance.
What
is the difference between an "employee" and an "independent
contractor"?
There
is no strict definition of "employee". In general, a worker
is an employee if you have the right to control and direct the
worker both as to the task to be accomplished and the manner
in which that task is to be accomplished.
The
IRS has developed a twenty-factor analysis (Form SS-8) to aid
in determining when a worker is an employee. These twenty factors
are applied on a case-by-case basis and are not weighted equally.
In an audit, the IRS will typically take the position that a
worker is an employee and force the employer to prove otherwise.
Any agreement you have with your workers as to their status
as independent contractors will have little or no force and
effect on the IRS's determination.
The
twenty factors are as follows:
INSTRUCTIONS.
An "employee" typically must comply with instructions about
when, where, and how to work. Moreover, control is present if
the employer has the mere right to control how the work results
are achieved.
TRAINING.
Training of an employee by an experienced employer indicates
control, in that the employer will typically train the employee
to perform tasks in the manner desired by the employer. On the
other hand, independent contractors ordinarily use their own
methods and receive no training from those hiring them.
INTEGRATION WITH BUSINESS. An employee's services are usually
integrated into the employer's business operations, because
the services are important to the success or continuation of
the business.
PERSONALRENDITION
OF SERVICES. An employee is required to render services personally.
This shows that the employer is interested in the methods as
well as the results.
HIRING,
SUPERVISING, AND PAYMENT OF ASSISTANTS. An employee generally
works for an employer that hires, supervises, and pays assistants
to the employee.
ONGOING
RELATIONSHIP. An employee generally has a continuing relationship
with an employer, as contrasted with independent contractors,
who typically work on a job-by-job basis.
SET
HOURS OF WORK. An employee usually has set hours of work established
by an employer. An independent contractor generally can set
her own work hours.
FULL-TIME
REQUIRED. An employee may be required to work or be available
full-time. This is another indication of control. Independent
contractors typically may work at times they choose.
WORK
DONE ON EMPLOYER'S PREMISES. Whereas employees usually work
on the premises of an employer, independent contractors can
typically work at places of their choosing.
SEQUENCE
OF WORK DONE. Whereas an employee may be required to perform
services in the order or sequence set by an employer, an independent
contractor can choose the order or sequence of work.
REPORTS
REQUIRED. An employee may be required to submit reports to an
employer. This is another indication of control.
PAYMENTS
BY TIME INTERVAL. Whereas an employee is generally paid by the
hour, week, or month, an independent contractor is usually paid
by the job or on a straight commission.
EXPENSES
ACCOUNT. Payment by the employer of the worker's business expenses
is another indication of control. An independent contractor
is typically required to bear his own expenses.
TOOLS
AND MATERIALS SUPPLIED. Employees are normally furnished most
of the tools, materials, and other equipment necessary to perform
the work functions by the employer. Independent contractors
typically supply their own tools and materials.
INVESTMENT
IN EQUIPMENT AND FACILITIES. Independent contractors typically
have a significant investment in the equipment and facilities
used in performing services for someone else.
PROFIT
OR LOSS. Whereas independent contractors can make a profit or
suffer a loss, employees are typically paid regardless of the
company's profitability.
AVAILABLE
TO GENERAL PUBLIC. Independent contractors are generally free
to provide and in fact do offer services to the general public.
MORE
THAN ONE EMPLOYER. Whereas an employee works for only one person,
an independent contractor may work for more than one unrelated
party.
POWER
TO FIRE. An employee can be fired by an employer. An independent
contractor cannot be fired without incurring potential liability.
RIGHT
TO QUIT. Whereas an employee can generally quit a job at any
time without liability, an independent contractor is usually
contractually obligated to complete a specific task or job.
Resolving
the issue
An
employer or employee, with or without the other's knowledge,
may request that the IRS make a determination as to the employment
status of a particular worker. This can be done by filing IRS
Form SS-8 Determination of Employee Work Status for Purposes
of Federal Employment Taxes and Income Tax Withholding with
the IRS.
