Do you provide training to the worker? Explaining your needs will not cause a worker to be deemed an employee, but if you provide extensive training to the worker the relationship could be deemed an employer-employer relationship.
Is reporting required by the worker? While employees are generally required to report to their employers, most contractors do not.
Is the work performed at your location or at the worker’s home or place of business? It’s best if the worker performs the tasks at her own location.
Is the worker required to perform the work personally, or can he or she delegate the tasks to someone else? A worker’s ability to delegate is indicative of a contractor.
Who determines how much the worker would be paid–you or the worker? If the worker has a set rate that he or she charges, that is more indicative of a contractor than if you offer a specific pay rate.
Does the worker advertise her services? If so, the worker will be more likely to be deemed a contractor.
How critical are the tasks to your business? If the tasks performed by the worker are integral to the business, it is more likely to be an employer-employee situation. If the work is more tangential than essential, the worker is more likely to be viewed as an independent contractor. For writers, our most critical task is writing our books. Virtually all other tasks, perhaps with the exception of editing, are secondary.
If the worker is paid benefits, such as insurance or vacation pay, the relationship is more likely to be considered an employer-employee relationship.
Giving the worker a title also implies an employer-employee relationship, as does hiring someone who had previously been an employee and performed similar work at that time.
Contracts Not Binding on Government
Many of my clients mistakenly believe they are without risk because they have a contract that specifically states the worker is an independent contractor. Be aware that the IRS, labor boards, and other government agencies are free to ignore any contractual term agreed upon between you and the worker that stipulates the worker’s status as an employee or contractor. The government will look at substance over form, and is not legally bound to a contract to which it was not a party.
If you’d like a definitive finding by the IRS regarding a worker’s status, you can file a form SS-8. The worker can also file this form.
Forms and Reporting Requirements
If your worker is an independent contractor, you need only have them complete a W-9 form prior to hiring them. If you pay the worker $600 or more in a given tax year, you would report the payments on a Form 1099-MISC by January 31 of the following year. If your worker is an employee, you must complete the I -9 form and make copies of specific documentation to verify their eligibility for employment. You would be required to file and pay withholding and unemployment taxes at various times throughout the year, and you would be required to provide a W-2 to the employee by January 31 of the following year.
As noted above, improper classification can put you at risk for back taxes, penalties, and interest. If these risks scare you, an easy solution is to hire a helper through a temporary agency. The employment agency is considered to be the worker’s employer and there should be no risk to you, though you may find yourself paying more for the services if you go this route.
Want to know more? Log on to the IRS website at www.irs.gov and take a look at IRS Publication 1779 (http://www.irs.gov/pub/irs-pdf/p1779.pdf) and Publication 15-A (http://www.irs.gov/pub/irs-pdf/p15a.pdf).
Diane Kelly is a CPA/tax attorney and the author of the humorous Death and Taxes romantic mystery series from St. Martin’s Press.