Friday, November 13, 2009

Contractor or Employee - an IRS View

Contractor or Employee?  An IRS definition on the relationship between owner and worker.

It is incumbent upon a business owner to correctly determine whether persons providing services are independent contractors or employees.  Generally, organizations must withhold income taxes, pay unemployment taxes, and withhold and pay SSN and Medicare taxes to an employee.  Generally, employers do not have to withhold or pay any taxes on payments to independent contractors and subcontractors.

The IRS states that three distinct facts from Common Law Rules define the nature of the worker's relationship to the company:

1. Type of Relationship - Does a written contract or employee benefits exist?  Is the relationship continual or for a defined period of time?

2. Financial - Who pays for the business aspects of the worker's job?  If the payer or employer, a worker might get reimbused for expenses.  Generally, unless otherwise agreed upon,  a contractor would supply the tools required for the job.  For instance, a contract carpenter would be expected to pay for his hammer, screwdriver or measuring tape, etc.

3. Behavioral - Does the company have a right to control the worker's job and how the work is performed?  If so, the worker likely falls into the employee class.

"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 an employer is still unclear about a worker's status after reviewing this information, a Form SS-8, Determination of Worker Status can be filed with the IRS for review and determination.  This process may take up to six months for resolution.

The full IRS article is here:,,id=99921,00.html

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