Rules to Determine if Employee or Contractor
- Business owners attempt to avoid the additional work of paying someone as an employee as well as making FICA contributions and unemployment tax by classifying workers as contractors instead of employees.
- The penalty for misclassifying a worker as a contractor instead of employee can be up to 35% of the payments made to the wrongly classified worker plus interest.
- Independent contractors paid over $600 must be issued a 1099-NEC by January 31 each year. A business should be collecting a W-9 from the contractor before paying the contractor so to have the contractor’s name, social security number or employer identification number and address. A 1099-NEC should be issued to all individuals, partnerships or LLCs taxed as a disregarded entity or partnership.
- To determine how an individual should be classified, the IRS has a form to assist in determination. IRS Form SS-8 provides factors the IRS uses to determine how an induvial should be classified. These factors include:
o Do you or can you require the individual to comply with instructions as to the when, where and how of the work?
o You train the worker to perform services in a particular manner
o You integrate the worker’s services into your business operations
o You require the worker to render services personally; the worker can’t hire others to do some of the work
o You hire, supervise and pay assistants for the worker o Your business has a continuing relationship with the worker or work is performed at frequently recurring intervals o You establish their hours of work or require the worker to devote the majority of the work week to your business o The worker provides services on your premises o You require the worker to do the worker in a sequence that you set or require the worker to submit regular reports as to the work performed o You pay the worker by the hour, week, or month unless they are installment payments agreed to in the worker’s contract o You pay for the workers business or traveling expenses o You furnish tools, equipment and materials o You have the right to discharge the worker at will and the worker has the right to quit at will
In order to prove a worker is an independent contractor:
- Have a written contract that specifies the responsibilities of both parties, how payment is to be determined for each job and include language that the contractor can hire his or her own assistants
- Require the contractor to furnish the tools, equipment and material needed for the job
- Make it clear the contractor is free to offer services to other businesses
- The contractor does most, if not all the work, at their own location
- Pay for work by the job, not by the hour, week or month
- Require the contractor to submit invoices for each job before you make payment
- Require the contractor to show proof of a business license and insurance
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