I am often asked by small business owners whether a worker for the company should be classified as an independent contractor or as an employee. It is very important that business owners understand the difference between the two classifications and their responsibilities regarding each type of worker.
An independent contractor is a person that has a right to control or direct only the result of the work and not what will be done and how it will be done. He or she usually operates under a business name, has more than one client and maintains a separate business account. Independent contractors are considered self-employed and are responsible for paying self-employment taxes. Some common professions that are sometimes considered independent contractors are dentists, veterinarians, lawyers, accountants, contractors and subcontractors. If the services provided by the contractor are controlled by an employer (what is done and how it is done), most likely the person is not an independent contractor.
An employee is a person who performs services for your business and the business controls what will be done and how it is done. An employee often receives training for the job to be done and works for only one employer. A person may still be considered an employee even if the employer gives the employee the freedom to act, but retains the right to control the details of how services are performed. A business owner is required to withhold income taxes, withhold and pay Social Security and Medicare taxes, as well as pay unemployment tax on any wages paid to an employee.
The IRS will generally consider three categories to determine the degree of control and independence of a person: behavioral, financial and type of relationship.
If a business owner is still unsure as to whether a worker is an employee or an independent contractor, a Form SS-8 can be filed with the IRS to have a determination made within six months. For more information visit the IRS or the Small Business Administration. You may also sign up here for me to send you a free checklist.
Charlotte Key is an attorney that focuses on business law, estate planning and probate law.