Employee or Independent Contractor?

If you are a business owner wondering whether to treat an individual working within your business as an employee or an independent contractor, here is what you should consider:

1.  Does your company have the right to control what the worker does and how they do it?  Are they allowed to work for other companies as well? (Behavorial Control)

2.  Do you control how the personal is paid? Do you reimburse them for expenses?  Do you provide the tools and equipment or do they? (Financial Control)

3.  Are there written contracts or employee type benefits? (Type of Relationship)

Once you consider these three factors, (behavior, financial, and relationship) then you can start to determine whether or not your worker should be an employee.  If the worker only works for you, you provide them with all needed equipment, and you offer them health insurance or a retirement plan, then most likely this worker should be treated as an employee.  If you allow the worker to work for other companies, do not provide them with necessary equipment, and offer them no benefits, then it is possible that they could be treated as an indepedent contractor.  Remember that when you have an employee it is your job to withhold income tax, and pay social security and medicare tax on that employee.  An independent contractor is simply paid for their work and issued a 1099 at year end. 

If you classify an employee as an independent contractor and have no reasonable basis for doing so, then it is possible that you can be held liable for paying employment taxes on that individual.  If you have any questions on how your worker should be classified (employee vs. independent contractor) then it is always a good idea with contact your tax professional.


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