Trying to determine whether someone is an employee can have a big impact on both the employer and the worker. If the worker is an employee you must withhold income tax and Federal Employment Taxes. You may also have benefits costs, worker’s compensation and other costs to consider. If the worker is truly an independent contractor you only have to worry about paying them for their services. That makes it very tempting to define someone as an independent contractor but you have some risks if you classify someone incorrectly.
The IRS has a form that you can use to help determine whether someone is a contractor or should be an employee. They also have a voluntary program to change someone’s status and limit your exposure to back taxes and penalties. This form can be filed with the IRS by an individual who thinks they have been mis-classified or a company wanting a determination. Here are examples of some of the questions on the form:
- What specific training and/or instruction is the worker given by the firm?
- How does the worker receive work assignments
- Who determines the methods by which the assignments are performed?
- At what location(s) does the worker perform services?
- Did the worker perform similar services for others during the time period?
- How does the firm represent the worker to its customers (for example, employee, partner, representative, or contractor), and under whose business name does the worker perform these services?