Independent Contractor or Employee?
Posted July 13th, 2015
Today’s workforce is undergoing some big changes. One of the most salient is the rise of independent contractors. More companies than ever before are using contingent labor. While this has some major benefits for employers, it can raise problems as well because sometimes it becomes difficult to distinguish between someone who is an independent contractor and an employee.
In fact, some businesses recently were fined by the government because people they were using as independent contractors actually fit the definition of employees, and so were entitled to the benefits offered to employees.
How can you decide which is which? The IRS offers some useful tips for determining the difference between the two.
To distinguish between contractor and employee, the IRS uses basically three criteria. The first is what they call behavioral control, which is used to determine if a business has a right to direct or control how work is done by means of instructions or training. The second criterion is financial control, which is used to determine whether a company has a right to control the financial and business aspects of a worker’s job. And the third criterion is type of relationship, which deals with how the worker and company perceive their connection to each other.
If the company has the right to control or direct the worker in both what is done and how it is done, then odds are the worker is an employee. However, if the company can only control the final product of the worker, the result of the work, but not how the work is accomplished, then the worker is probably an independent contractor.
Knowing the difference is important because tax levies are different for each. Employers who erroneously classify employees as independent contractors could end up paying a lot more in taxes, in addition to penalties for not filing the proper tax forms. Also, workers themselves can avoid higher taxes and lost benefits if they know what their proper status is.
If you as an employer or as a worker are not sure of your status, either one of you can ask the IRS to decide the issue by filling out Form SS-8.
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