Do you know if your worker is technically an employee or an independent contractor? The line can be blurry. The IRS provides guidelines to help you figure it out, but sometimes it’s not enough. The choice you make will have a significant impact on your staff and your taxes. It’s important that you’re accurate.
Consider these behavioral, financial, and relationship-based factors from the IRS to decide how to classify your workers:
1. Behavioral: If you dictate how to work, this suggests the person is an employee. Dead giveaway: if you hold trainings, you probably have employees.
2. Financial: This one is a bit more cut and dry. An independent contractor usually has a significant financial investment in the job. For example, they usually own their equipment or aren’t reimbursed for expenses. If you have the opportunity for profit or loss, this is another indicator that you’re in business for yourself and may be an independent contractor.
3. Relationship: The IRS defines this as “facts that illustrate how the business and worker perceive their relationship.” Benefits may be the most significant piece in determining the relationship. Employees are far more likely to receive benefits.
Independent contractor vs. employee
Besides issues with the IRS, misclassification could poorly affect your employees. An employee will receive a W-2 for tax purposes, while an independent contractor will get a 1099-MISC.
Still not sure? You can file Form SS-8 to the IRS, and they will send back some guidance, but I recommend reviewing it with your CPA or business advisor for clarification.
Can you tell if this person is an independent contractor or an employee?
Question 1: Bill, the Builder
You hire Bill, a skilled technician, for routine office maintenance. He comes in at regularly scheduled times that you set. He owns his own business and equipment and has other clients. You technically employ Bill, but he isn’t a full-time employee who operates under your business’s human resources rules and standards. See the answer at the bottom.
Question 2: Sally, the Sales Rep
Sally works full-time for her company as a sales representative. She covers a territory, has her own clients, and makes a commission. But, she reports to the main office, where she follows instructions and directions from a supervisor. She also is reimbursed for her expenses. So is she an independent contractor or an employee?
Answers:
1. Bill is a classic example of an independent contractor. He will definitely receive a 1099.
2. Sally’s position is not as clear. Her employer considers her an independent contractor, but her expense reimbursement and training are strong points for the employee classification. The business owner could have misclassified her as an independent contractor or may have made a decision based on back-end financial reasons. We would recommend this business owner to complete the SS-8 form and review it with their accountant.
Please feel free to call us if you need help determining worker classification correctly.
By: Sarah Moore
Manager
