11/13/2008
Employee or Independent Contractor?
by Paul Considine, Center Director, SAU SBTDC
Many companies think that they can avoid employment withholding taxes by calling workers independent contractors. The IRS has strict rules that cover this difference and penalties can be severe for businesses that do not comply with the rules. In the determination, all information that provides evidence of the degree of control and independence must be considered. Broadly the rules fall into three categories.
Behavioral: Does the company control what the worker does and how it is done? This also includes controlling the starting and stop time of the work.
Financial: Does the company control how the worker is paid, provide the tools, and determine whether job related expenses are reimbursed?
Type of relationship: Are there written contracts or employee type benefits such as pensions, vacation pay, or insurance? Will the relationship last for a long period of time and is the work performed a key aspect of the business?
The IRS has developed a tool that can help business determine the difference between employees and contractors. The questions asked in this tool are very specific and include discussions about many facets of the work related activities. It is form SS-8 and can be found in the Forms section of the IRS web site, www.irs.gov.
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