Employee or Independent Contractor? Know the Rules

May, 01 2017 by Haley McClellan

The IRS encourages all businesses and business owners to know the rules when it comes to classifying a worker as an employee or an independent contractor.

An employer must withhold income taxes as well as pay Social Security, Medicare tax, and unemployment tax on wages paid to an employee. Employers normally do not have to withhold or pay any tax on payments to independent contractors. 

Here are some differences between an employee and an independent contractor: 

Employee 
 

• Usually works for one employer. 
• Accomplishes tasks in the manner the employer has requested; under owner's control. 
• Often receives employment benefits, such as health insurance, 401k, etc. 
• Will receive worker's compensation for any workplace injury. 
• Covered by federal and state wage and hour laws. 
• Usually works at employer's office. 
   

Independent Contractor 
 

• Sets their own hours. 
• Works from their own office/home. 
• Possess more autonomy in deciding how to go about accomplishing their tasks. 
• Incurs costs associated with the job. 
• Not eligible for worker's compensation 
• Is not subject to tax or FICA withholding, but pays his or her own self-employment tax. 

Here are a couple of points for business owners to keep in mind when it comes to classifying workers:  

Control 
 

• What is the extent of the worker's investment in the facilities or tools being used? 
• How are you compensating the worker for the services they perform? 
• Does the worker experience a realization of profit or incurring a loss? 
   

Relationship  

• A written contract that describes the relationship between the worker and the business. 
• Does the business provide the worker with employee-type benefits? 
• What is the permanency of the worker? 
• Is the worker reimbursed for business expenses? 

How the employer and worker perceive their relationship is also important for determining worker status. 

The IRS can help employers determine the status of their workers by using form Form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. IRS Publication 15-A, Employer's Supplemental Tax Guide, is also an excellent resource.