It seems like every year we have the discussion with one or two of our clients whether someone is an employee or independent contractor. I also see court cases each year where someone was not categorized properly by the taxpayer (usually treating them as a contractor rather than an employee). If someone is an employee, the employer is required to withhold taxes from that person as well as pay their share of employment taxes. If they are a contractor, there is generally no withholding and all tax is the responsibility of the individual. Recently there was another case on this very point, Bruecher Foundation Services Inc v. U.S. (CA 5 06/18/2010) 105 AFTR 2d ¶ 2010-997. If you’re paying someone to do work for you and you’re not withholding taxes, you may want to evaluate if they truly are a contractor or should they be an employee. These determinations are generally done on a “facts and circumstances” basis. If you wait for the IRS, state revenue agency or department of labor to make the determination for you, it can be a very painful and expensive process to fix this. In the above mentioned case, they list some of the items that are looked at when making such a determination, starting with:
“Whether a worker is an independent contractor or employee generally is determined by whether the enterprise he works for has the right to control and direct him regarding the job he is to do and how he is to do it. Under the common-law rules (so-called because they originate from court cases rather than from the Code), factors used to determine if an individual is a common law employee are”
- The degree of control exercised by the principal;
- which party invests in work facilities used by the individual;
- the opportunity of the individual for profit or loss;
- whether the principal can discharge the individual;
- whether the work is part of the principal’s regular business;
- the permanency of the relationship;
- the relationship the parties believed they were creating; and
- the provision of employee benefits.
This is by no means an exhaustive, list, but a start to get you thinking about the issue. There has been a great deal published in this area.
For additional information view our previously posted blog “Misclassification of employees as independent contractors”. or visit the IRS’s summertime tax tips.
