How to Tell the Difference Between an Employee and an Independent Contractor
Ask yourself, “Who’s in charge?” In business audits, the IRS uses three general criteria to determine the relationship between companies and workers: 1) Behavioral Control - does the business direct or control how the work is done and what hours the...
Step-by-Step Guide
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Step 1: Ask yourself
2) Financial Control
- does the business direct or control the financial and business aspects of the worker? 3) Type of Relationship
- how do the worker and business owner perceive their relationship? If the company is determining only what work is done, their workers are probably independent contractors.
On the other hand, if they control not only what is done, but how it is done (when, where, etc.), then the workers are probably employees. -
Step 2: “Who’s in charge?” In business audits
What risk of loss does the worker have? Do they pay for and use their own tools (computer, printer, high-speed, etc.), or do you provide them with what they need? When it comes to employment tax audits, the worker carrying the liability is an independent contractor. , To avoid unpaid employment taxes, discover if your accounting department is writing checks to “Jane Doe” or “Jane Doe, Inc.” If the worker is doing business under a DBA fictitious business name, LLC or other organizational umbrella, an employment tax audit would most likely declare that person a contractor. , Most independent contractors juggle many clients at a time.
If your worker refuses to sign an exclusivity agreement, they are likely working for other companies and consider themselves free agents.
An employment tax audit or business audit would consider them an independent contractor. , If you’re in need for tax relief the best defense against unpaid employment taxes is in the paperwork.
An experienced independent contractor will ask for a 1099 form and pay their own taxes to avoid payroll tax problems.
If you’re hiring an independent contractor for the first time, it is incumbent upon you to ensure that they know what their responsibilities are and avoid unpaid employment taxes. , Both employers and workers can ask the IRS to determine whether a worker is an independent contractor or an employee.
All you need to do is file a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.
They will apply a 20-point common law test, internal revenue code section 5-30, that determines whether that person is an employee or an independent contractor. , Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS website or by calling the IRS at 800-829-3676 -
Step 3: the IRS uses three general criteria to determine the relationship between companies and workers: 1) Behavioral Control - does the business direct or control how the work is done and what hours the employee works?
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Step 4: Determine where the buck stops.
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Step 5: Check the name on the check.
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Step 6: Ask them to sign an exclusivity agreement.
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Step 7: Ask whether they want a W-2 or 1099.
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Step 8: When in doubt
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Step 9: ask the IRS to make the determination.
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Step 10: Visit irs.gov and select the Small Business link.
Detailed Guide
2) Financial Control
- does the business direct or control the financial and business aspects of the worker? 3) Type of Relationship
- how do the worker and business owner perceive their relationship? If the company is determining only what work is done, their workers are probably independent contractors.
On the other hand, if they control not only what is done, but how it is done (when, where, etc.), then the workers are probably employees.
What risk of loss does the worker have? Do they pay for and use their own tools (computer, printer, high-speed, etc.), or do you provide them with what they need? When it comes to employment tax audits, the worker carrying the liability is an independent contractor. , To avoid unpaid employment taxes, discover if your accounting department is writing checks to “Jane Doe” or “Jane Doe, Inc.” If the worker is doing business under a DBA fictitious business name, LLC or other organizational umbrella, an employment tax audit would most likely declare that person a contractor. , Most independent contractors juggle many clients at a time.
If your worker refuses to sign an exclusivity agreement, they are likely working for other companies and consider themselves free agents.
An employment tax audit or business audit would consider them an independent contractor. , If you’re in need for tax relief the best defense against unpaid employment taxes is in the paperwork.
An experienced independent contractor will ask for a 1099 form and pay their own taxes to avoid payroll tax problems.
If you’re hiring an independent contractor for the first time, it is incumbent upon you to ensure that they know what their responsibilities are and avoid unpaid employment taxes. , Both employers and workers can ask the IRS to determine whether a worker is an independent contractor or an employee.
All you need to do is file a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.
They will apply a 20-point common law test, internal revenue code section 5-30, that determines whether that person is an employee or an independent contractor. , Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS website or by calling the IRS at 800-829-3676
About the Author
Daniel Hayes
Brings years of experience writing about home improvement and related subjects.
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