IALD BUSINESS FORUM :

INDEPENDENT CONTRACTOR OR EMPLOYEE?

BY PAMELA BECK DANNER, ESQ. & PAULA E. HAEFNER, ESQ.

DANNER & ASSOCIATES

It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors. If you are an independent contractor and hire or subcontract work to others, you will want to review the information in this article to determine whether individuals you hire are independent contractors (subcontractors) or employees.

Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

Facts that provide evidence of the degree of control and independence fall into three categories:

• Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
• Financial: Are the business aspects of the worker's job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) 
• Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

 Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. 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 keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

If, after reviewing the three categories of evidence, it is still unclear whether a worker is an employee or an independent contractor, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding can be filed with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker's status. Be aware that it can take at least six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form SS-8 (PDF).

Once a determination is made (whether by the business or by the IRS), the next step is filing the appropriate forms and paying the associated taxes. Even if the determination is that the worker is an independent contractor, one must file certain forms. 

Form W-9

If you've made the determination that the person you're paying is an independent contractor, the first step is to have the contractor complete Form W-9, Request for Taxpayer Identification Number and Certification. This form should be kept in your files for four years for future reference in case of any questions from the worker or the IRS.

Form 1099-MISC

Form 1099-MISC is most commonly used by payers to report payments made in the course of a trade or business to others for services.  If you paid someone who is not your employee, such as a subcontractor, attorney or accountant $600 USD or more for services provided during the year, a Form 1099-MISC needs to be completed, and a copy must be provided to the independent contractor by 31 January of the year following payment. You must also send a copy of this form to the IRS by 28 February.  There are certain situations where a 1099 is not required. These exceptions are listed in the 1099 Instructions.

If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker (the relief provisions, discussed below, will not apply). See Internal Revenue Code section 3509 for more information.

This article was produced by:

Danner & Associates

1364 Beverly Road, Suite 101

McLean, VA 22101 USA

Tel: +1 703 734 2793

Fax: +1 703 903 8949

Email: pbdanner@IDEAMATICS.net

www.dannerandassociates.com