Employee or Not?

The IRS loves this question. Generally speaking, an independent contractor is a person who provides goods or services to you under a contract on a “freelance” basis. An employee provides services regularly under the direction of their employer. Businesses prefer hiring independent contractors over employees for several reasons, including reduced liability, flexibility in hiring/firing, and general savings to the business.

How does one get on this gravy train with biscuit wheels? Let’s discuss what makes a worker an independent contractor or an employee.

The local student you hire to sell clothes after school is an employee. I don’t care if she only works weekends. She comes in when you tell her to and she leaves when you tell her to leave. She works at your store, not at her home or office. She wears the apron purchased for her by the company. She will continue working for the store until she quits or is terminated. All of these things indicate to me that she is an employee — even if you call her an independent contractor and you make her sign something saying she is an independent contractor. It may sound clever to just call her an independent contractor, but I promise you the IRS has heard it before.

So who is an independent contractor? Here’s a lawyer’s answer for you: it depends. The plumber you call to fix your restroom is an independent contractor, because he has his own business, he sets his own schedule, and he decides how much he will be paid for his services. Your doctor is an independent contractor, as is your accountant, the girl who cuts your hair, your dry cleaner and your personal trainer, just to name a few.

In making a determination, the IRS emphasizes the right to control and direct the individual who performs the services. There are many other factors that go into deciding, including how the worker is paid, whether their expenses are reimbursed, whether there is a contract, how long the relationship will continue, and more. It’s the IRS — they never run out of questions.

If you call an employee an independent contractor, you could be exposing your company to considerable liability for the payment of back taxes, even more so if the mischaracterization is intentional. Generally, businesses must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee, none of which are usually required for independent contractors.

If you are planning on hiring someone whom you know will be an independent contractor, document that arrangement in a written agreement. If you are paying an independent contractor more than $600 in one year, you are required to report it to the IRS and the contractor using a Form 1099-MISC.

Still not sure whether your worker is an employee or an independent contractor? The IRS will give you an official determination if you fill out a Form SS-8, which can be filed by either the business or the worker. Be warned, though, that the IRS takes its time with these things and it can take at least six months to get a determination.

Mary Hudson is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached at mary@hudsonluros.com or 877-6279. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.