Employee or Independent Contractor

Before you can determine how to treat payments made for services, you must first know the business relationship that exists between you and the person performing the services.  This relationship generally falls into one of the four following categories: an independent contractor, a common-in-law employee (employee), a statutory employee or a statutory nonemployee.

In determining whether the person providing the service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

It is critical that you, the employer, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee.  You do not generally have to withhold or pay any taxes on payments to independent contractors.

CAUTION: If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty.

Who is an Independent Contractor?

A general rule is that you, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.

You may be required to file information returns to report certain types of payments made to independent contractors during the year.  For example, you must file Form 1099-MISC, to report payments of $600 or more to persons not treated as employees (e.g. independent contractors) for services performed for your trade and business.

Who is an Employee?

A general rule is that anyone who performs services for you is your employee if you can control what will be done and how it will be done. Facts that provide evidence of the degree of control and independence fall into 3 categories: behavioral control, financial control and the type of relationship of the parties.  Refer to Tax Topic 762 for more on these three categories.     To continue this article ... click here.