An IRS definition on the differences and relationship between company and worker.
It is incumbent upon a business owner to correctly determine whether persons providing services are independent contractors or employees. Generally, organizations must withhold income taxes, pay unemployment taxes, and withhold and pay SSN and Medicare taxes to an employee. Generally, employers do not have to withhold or pay any taxes on payments to independent contractors and subcontractors.
The IRS states that three distinct facts from Common Law Rules define the nature of the worker's relationship to the company:
1. Type of Relationship - Does a written contract or employee benefits exist? Is the relationship continual or for a defined period of time?
2. Financial - Who pays for the business aspects of the worker's job? If the payer or employer, a worker might get reimbursed for expenses. Generally, unless otherwise agreed upon, a contractor would supply the tools required for the job. For instance, a contract carpenter would be expected to pay for his hammer, screwdriver or measuring tape, etc.
3. Behavioral - Does the company have a right to control the worker's job and how the work is performed? If so, the worker likely falls into the employee class.
Independent Contractor
"The general rule is that an individual is an independent contractor if (the person for whom the services are performed) has the right to control or direct only the result of the work, and not what will be done and how it will be done or method of accomplishing the result.
People such as lawyers, contractors, subcontractors, public stenographers, and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case. The earnings of a person who is working as an independent contractor are subject to Self-Employment (SE) tax."
"Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination."
If an employer is still unclear about a worker's status after reviewing this information, a Form SS-8, Determination of Worker Status can be filed with the IRS for review and determination. This process may take up to six months for resolution.
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After a determination of worker status is made, either by the company or IRS, the appropriate forms should be completed and taxes paid. Below are links to these forms:
Misclassification of workers may result in tax consequences for an employer. Consult IRS code section 3509 for further information.
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An additional category of worker is one that is self-employed. The IRS considers a person as self-employed if:
- The individual has a trade or business as a sole proprietor; or
- The individual is a member of a partnership or limited liability company (LLC) that files a form 1065
One might also be considered as self-employed if one has a part-time business in addition to a regular job.
The full IRS article is here: http://www.irs.gov/businesses/small/article/0,,id=99921,00.html
A link to the IRS small business tax center: http://www.irs.gov/businesses/small/
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The dream of a budding entrepreneur can become reality with the team work of experienced professionals. Building a team of professionals to help you establish your business is key for the success of any business.
