Independent Contractor (Self-Employed) or Employee?

January 23, 2017

It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors.


Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.


Select the Scenario that Applies to You:

 

  • I am an independent contractor or in business for myself

If you are a business owner or contractor who provides services to other businesses, then you are generally considered self-employed. For more information on your tax obligations if you are self-employed (an independent contractor), see our Self-Employed Tax Center.

  • I hire or contract with individuals to provide services to my business

If you are a business owner hiring or contracting with other individuals to provide services, you must determine whether the individuals providing services are employees or independent contractors. Follow the rest of this page to find out more about this topic and what your responsibilities are.

 

Determining Whether the Individuals Providing Services are Employees or Independent Contractors


Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be -

 

  • An independent contractor

  • An employee (common-law employee)

  • A statutory employee

  • A statutory nonemployee

  • A government worker


In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.


Common Law Rules


Facts that provide evidence of the degree of control and independence fall into three categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

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.

 

To read this article further, please visit: https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

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