Background
The Internal Revenue Service (IRS) and the Bureau of Labor and Industry (BOLI) impose severe fines and penalties on entities that treat employees as independent contractors and who fail to withhold taxes and provide proper benefits. To avoid the burden and expense of payroll taxes and other overhead, some employers inappropriately designate Individuals as "independent contractors." If the IRS or BOLI determines that the individual is an "employee," the person responsible for collecting and paying withholding taxes may be held personally liable for an amount equal to the taxes that should have been withheld and/or the benefits that should have been provided.
There are several factors involved in determining an individual’s status. Meeting just one of the criteria may qualify the individual as an employee. These factors generally fall into one of the following categories:
An employer must generally withhold and pay income taxes, social security, Medicare taxes, and unemployment taxes on wages paid to an employee. However, an employer does not generally withhold or pay any taxes on payments to independent contractors.
To help determine whether an individual is an employee under federal and state regulation, the following criteria may be used as guidelines to determine whether sufficient control is present to establish an employer-employee relationship.
This criteria should be considered guidelines. Not every factor is applicable in every situation, and the degree of importance of each factor varies depending on the type of work and individual circumstances. However, all relevant criteria are considered when deciding, and no one factor is decisive. A written agreement between the individual and the potential employer that states certain criteria do not apply bears no impact on the determination if the facts indicate otherwise.
Behavioral Control Factors
Instructions
An employee must comply with instructions about when, where, and how to work. Even if no instructions are given, the control factor is present if the employer has the right to control how the work results are achieved.
Training
An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods and receive no training from the purchasers of their services.
Integration
An employee's services are usually integrated into the business operations because the services are important to the success or continuation of the business. This shows that the employee is subject to direction and control.
Services rendered personally
An employee renders services personally. This shows that the employer is interested in the methods and the results.
Hiring assistants
An employee works for an employer who hires, supervises, and pays workers. An independent contractor can hire, supervise, and pay assistants under a contract that requires them to provide materials and labor and to be responsible only for the result.
Continuing relationship
An employee generally has a continuing relationship with an employer. A continuing relationship may exist even if work is performed at recurring although irregular intervals.
Set hours of work
An employee usually has set hours of work established by an employer. An independent contractor generally can set their own work hours.
Full-time required
An employee may be required to work or be available full-time. This indicates control by the employer. An independent contractor can work when and for whom they choose.
Work done on premises
An employee usually works on the premises of an employer. Or works on a route or at a location designated by an employer.
Order or sequence set
An employee may be required to perform services in the order or sequence set by an employer. This shows that the employee is subject to direction and control.
Reports
An employee may be required to submit reports to an employer. This shows that the employer maintains a degree of control.
Finacial Control Factors
Payments
An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job or on a straight commission.
Expenses
An employee's business and travel expenses are generally paid by the employer. This shows that the employee is subject to regulation and control.
Tools and materials
An employee is normally provided with significant tools, materials, and other equipment by an employer.
Investment
An independent contractor has a significant investment in the facilities they use in performing services for someone else.
Profit or loss
An independent contractor can make a profit or suffer a loss.
Relationship of the Parties Factors
Works for more than one person or firm
An independent contractor is generally free to provide their services to two or more unrelated persons or firms at the same time.
Offers services to the general public
An independent contractor makes their services available to the general public.
Right to fire
An employee can be fired by an employer. An independent contractor cannot be fired so long as they produce a result that meets the specifications of the contract.
Right to quit
An employee can quit their job at any time without incurring liability. An independent contractor usually agrees to complete a specific job and is responsible for its satisfactory completion, or is legally obligated to make good for failure to complete it.