This is the second part of a two-part series.  Read When Is An Employee Not An An Employee? Part 1 here.

HE SAYS:

Generally, the following are characteristics of an employee rather then an Independent Contractor:

  • The worker is required to comply with instructions about when, where, and how the work is done.
  • The worker is provided training by the employer.
  • The success or continuation of the business significantly depends on the work being performed by the worker.
  • The employer hires, supervises or pays the assistants to the worker.
  • The worker has a permanent or indefinite work relationship with the employer.
  • The employer sets the worker’s hours.
  • The worker is paid by the hour, day or week rather than by the job.
  • The worker’s business and travel expenses are reimbursed by the employer.
  • The worker performs the work only for the one employer and not to the general public.
  • The worker does not supply any required materials.
  • The worker does not have an investment in the tools or facilities used to perform the work.
  • The worker cannot generate a profit or loss from the work being provided.
  • The worker can terminate the relationship with the employer at any time even if the work is not completed.   
  • The worker is required to perform all of the work on the employer’s premises.

The above are simply guidelines to help you make the determination of when a worker is an employee; however, even if some of these characteristics exist, the worker may still be classified as an Independent Contractor.   In many cases, it will be the degree to which these characteristics exist that will be the deciding factors.    Each situation must be judged on its own unique circumstances.

If you would like more information, you should consult with an accountant or tax attorney; or, check the relevant IRS publications.

WHAT DO YOU SAY?

HE SAYS:

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.

WHAT DO YOU SAY?