Tax Issues
Independent Contractor vs. Employee
A common problem among small businesses is the incorrect treatment of employees as independent contractors. If the IRS reclassifies an independent contractor as an employee, the employer could become responsible for the employment taxes that should have been withheld from the employee's wages as well as the employer's matching portion of Social Security and Medicare. In addition, the employer could be responsible for federal and state unemployment taxes and then be assessed interest and penalties on top of everything else.
Because the taxes, interest, and penalties for incorrect treatment can potentially be so great, it is very important for small business owners to make sure they understand the difference between an independent contractor and an employee.
1. Behavior Control an employer has the right to control how an employee
does the work
a. You tell your payees where to be, when to be there, and what to do
when they're there
b. The work must be done personally by your payees
c. You provide training
2. Financial Control
a. There is no risk of loss to your payees for the work they perform
• They are not required to pay any business expenses personally
b. Your payees don't have their own equipment, tools, materials, etc
c. They don't (and sometimes can't) work for anyone else
d. Your payees are paid either hourly or salaried instead of by the job or
a commission
3. Relationship
a. There is no written contract designating your payee as an independent
contractor
b. You provide benefits
c. You maintain an ongoing business relationship
d. The payees services are an integral part of your company's continuing
operations
4. Other Considerations less important but considered nonetheless
a. Employer's right to discharge the payee
b. Payee's right to terminate the business relationship
c. Part-time or full-time work requirements
d. Work required to be done on employer's premises
e. Setting of hours to do the work
f. Setting order of sequence of the work
g. Interim oral or written reports requirement
These considerations assist the IRS in making a determination of employee status and, most likely, no one consideration by itself will persuade the IRS one way or the other. However, if many or even only some of the above conditions exist in your contractual agreements (written or unwritten) with those who provide services for your company, you may want to reconsider either paying them as an employee or changing the agreement.
Below are a couple of links to the IRS and State of Utah for some guidance on this issue.
IRS Publication 1779, Independent Contractor or Employee...
Utah Department of Workforce Services Guidelines for Employment Status (Independent Contractors)
