As a business owner, it is critical to properly classify individuals providing services for your business. The IRS considers improper classification as a “Misclassification”. A worker misclassification could lead to potential financial and legal consequences. Generally, as a business owner, your workers will either be classified as Independent Contractors or Employees.
Who is considered an independent contractor?
According to the IRS “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
An Independent Contractor is also considered as a Self-Employed individual and is generally subject to Self-Employment Tax.
Independent Contractors are usually able to determine their own working hours and supply their own tools.
Who is considered an employee?
The IRS considers a worker as an Employee if the payer can control what services can be done and how those services are completed.
Generally, as an Employee, you will be provided tools and job training. Most Employees will also work a specific schedule provided by the payer.
How do I make this determination?
Determining the correct worker classification is not always definite. The IRS states “There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.”
The IRS does offer an alternative if you are unable to make a clear determination in the classification. A business owner can complete a Form SS-8 with the IRS. This form will provide information about the worker to aid the IRS in determining the correct classification.