By Guest Blogger – Sandy Abalos, CPA
There are times when it seems unclear whether a worker who performs services and is paid by your company is subject to employment taxes. The answer depends on whether that worker is an employee or an independent contractor. Because the determination of a worker’s status depends on facts that may differ in each case, you need to be able to define the business relationship on a case-by-case basis:
- In general, an employee is considered to be someone who works for and performs services under the control of your company.
- An independent contractor is in business for himself or herself, and performs the services free of your company’s control.
When you are determining whether an individual is an employee or an independent contractor, the IRS stresses that you must consider all evidence of the degree of control you have over that individual and the degree of independence that person has from your company.
The evidence of the degree of control and independence falls into three major categories: behavioral control, financial control and the type of relationship between your company and the employee.
1. Behavioral Control
Does your business have the right to direct and control how the worker does the task for which you have hired him or her? To answer this question, consider the following:
- The type and degree of instructions your business provides to the worker. An employee is generally subject to the instructions from the business about when, where and how to work. Even if your business provides no instructions, sufficient behavioral control may exist if you, as an employer, have the right to control how the work results are achieved.
- Any training that your business provides to the worker. If your business has trained an individual to perform services in a particular manner, indications are that person is an employee, since independent contractors generally use their own methods.
2. Financial Control
Does your business have a right to control the business aspects of the worker’s job? To answer this question, consider the following questions:
- Does the worker have unreimbursed business expenses? If so, this indicates independent contractor status.
- Does the worker have a significant investment in the facilities or tools used to perform services for your business? If so, this indicates independent contractor status.
- Does the worker make services available to the relevant market? If the worker performs services for other businesses, this indicates independent contractor status.
- Does your company pay the worker by the hour, week or month? An independent contractor is usually paid by the project. However, some professionals, such as lawyers are paid by the hour and are considered independent contractors.
- Can the worker make a profit or incur a loss on services performed for your business? If so, this indicates independent contractor status.
3. Type of Relationship
The type of relationship between the parties is indicated by facts that include the following:
- Any written contracts describing the type of relationship the parties intended to create.
- Whether your business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay.
- The permanency of the relationship. Employer/employee relationships generally have the expectation that the relationship will continue indefinitely, rather than for a specific project or period of time.
- Whether the worker provides services that are a key aspect of your company’s business activity. If so, this may indicate an employee status.
Upon request, the IRS will make a determination for you whether a worker would be deemed an employee based on the information provided by filing Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding).
Sandra A. Abalos, CPA is the managing partner of Abalos & Associates, PLLC, a full-service, award-winning CPA firm in Phoenix that specializes in the needs of privately held businesses. For more information, contact (602) 943-1984 or visit the website at http://www.abaloscpa.com.