The title may lead you to think I am simply giving you a riddle to solve; however, finding the answer to this question is no game.    Whether or not someone who provides services to your business is an employee or an Independent Contractor can have a significant impact on you and your business.

Generally, an employer must withhold taxes, withhold and pay social security and Medicare taxes, and pay unemployment taxes on wages paid to an employee.   The employee must receive a W-2 tax form by the end of January showing the total wages and the withholdings for the prior year.  An employer is also usually required to provide Workers’ Compensation and Disability Insurance coverage to employees.

None of the above obligations would apply to an Independent Contractor.   Independent Contractors are in business for themselves and must follow the self-employment tax rules, including filing quarterly estimated taxes and filing a Schedule C with their Federal Income Tax Return.    Independent Contractors that you hire must receive a 1099 Tax Form from you, by the end of January, if the amount you paid for the prior year is over $600.00 and the Independent Contractor is not a corporation.

The distinction between an employee and an Independent Contractor also has a legal significance.   Most states recognize the doctrine of Respondent Superior which means that, in most cases, the employer is vicariously liable to any third parties injured by an employee while that employee is engaged in a work or work related activity.

To best determine when a worker is an employee or an Independent Contractor we need to look at the guidelines developed by the Internal Revenue Service.

In the next installment we will look at the specific IRS guidelines.