In business you use the services of various individuals and companies
to accomplish the goals of your company. The relationship that your company
has with these individuals will determine whether they are your employees
or simply contract laborers or "independent contractors".
Employees are generally under the direct control of the business while
contract laborers generally direct themselves.
The business has more responsibility for taxes and other items for employees
than it does for contract laborers. |
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HOW IS THE TAX TREATMENT DIFFERENT?
When a worker is treated as an employee, the business must withhold income
and social security taxes as well as match the social security tax from
its own funds. It must also pay state and federal unemployment taxes. In
addition it will probably be liable for workers' compensation insurance.
Quarterly and annual reports must be filed for the taxes and deposits of
the taxes must be made on a timely basis.
When a worker is treated as a contract laborer, that person is considered
to be in business for himself and is, therefore, responsible for his or
her own taxes. The only responsibility of the business using the worker
is to file a Form 1099 to report what it paid the worker annually provided
the amount exceeds a certain limit.
HOW DO YOU DETERMINE WHO IS A CONTRACT LABORER
AND WHO IS AN EMPLOYEE?
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That is a tough question to answer because the law is somewhat vague.
Some people are obvious: if they work in your business full time under your
control at a set hourly wage or salary where you set the hours, they are
employees. If they own a business that performs services for several customers
they are probably not.
To determine an individual's status you should consider various factors
as follows: |
Control -
If the business instructs the worker as to when, where and how the work
is to be performed and trains that worker, this implies the worker is an
employee. Also if the individual's work is an integral part of the business
operation and reports must be given with regard to the work, this will also
suggest employee status.
In essence, if there is any control over the worker by the business,
they are an employee.
Time and Location of work -
If a person works full time at the business' location, then they are
most likely an employee. However, they may also be part time or seasonal
and still be an employee if there is an ongoing relationship.
If the worker sets the hours and schedules the work, this would suggest
a contract labor relationship. |
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Does it look like a business? -
If a worker performs his work like a business would, he is probably not
an employee. Businesses usually have an investment in equipment and facilities
and have a risk of loss. They market their services to the general public
and have multiple clients. In addition, they hire their own assistants to
get the work done.
Pay and Expenses -
Contract laborers are generally paid by the job, whereas employees are
paid based on time. The business will pay the expenses of the employee that
are related to the work, but a contract laborer will pick up those costs
himself.
Liability -
A business can fire an employee at any time and an employee may quit
at any time. A contract laborer and the business will be bound by the contract
set.
HOW DO YOU COVER YOURSELF?
When in doubt, treat the worker as an employee. If you feel that certain
workers should be treated as contract laborers, you should follow these
tips.
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After making a determination based on the various factors, you must be
consistent. You cannot treat one worker as a contract laborer while a similar
worker is treated as an employee. A written contract stating the relationship
will also help, provided there is other evidence to support it.
Finally, be sure to have the worker fill out a Form W-9 to get their
full name, address and social security number. Then at the end of the year
file a Form 1099 to report amounts paid to that worker. |
CONCLUSION
While the status can always be challenged, the better the documentation
you have for your decision, the better you will fair. At Jeffrey L. Sailor,
CPA, we will be glad to help you make the right decisions. | 
