Employee vs. Independent Contractor

TaxBizPro, LLC Posted on: September 6, 2009 9:34

If you were thinking of getting additional office help and wanted to hire someone on a part-time of full-time basis you need to understand the difference between employees and independent contractors. There is a major difference between employees and independent contractors when it comes to how much tax you as an employer has to pay and withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.

Behavioral Control, Financial Control, and the Type of Relationship, are main factors that will play a key roll in making the correct determination between employees and independent contractors.

Behavioral Control-shows whether the employer directs or controls how the work is done through instructions, training, supervision or other means.

Financial Control-shows whether the employer directs or controls the financial and business aspects of the worker’s job.

The Type of Relationship-factor relates to how the workers and the business owner perceive their relationship.

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. A good example of an employee would be an office receptionist. The employer first trains him/her, and directs when to answer the phones, what to say and how to take the information.

If the employer 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 most likely independent contractors. A good example would be a computer programmer or consultant. An employer gives him/her a certain computer project. The computer programmer is not directed nor instructed by the business owner on how to do the work. Upon completion of the computer project the employer gets the end result. If there is a need to improve or modify the computer program, the employer will notify computer programmer to make corrections or implement additional feature to the existing project.

Employers, who misclassify workers as independent contractors rather than employees, can end up with additional tax bills and face penalties for failing to pay payroll taxes and for failing to file required payroll tax forms.

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 a Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding – with the IRS.

To learn more see: Contractor vs. Employee, Publication 1779, Publication 15-A

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