Why is worker classification important?
If a worker is an employee, you as the employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on the wages paid to the worker. Workers who are independent contractors are responsible for paying their own Social Security and Medicare taxes, which is called self-employment tax. The employer pays half of the employee’s self-employment tax and the employee pays the other half. Independent contractors pay the full amount of self-employment tax themselves.
What Factors Determine Whether a Worker is an Independent Contractor or Employee?
According to the IRS website, the three main factors that help an employer decide whether a worker is an employee or independent contractor are:
- Behavioral control
- Financial control
- Relationship
How Does Behavioral Control Factor into Work Status?
The employer has more control over an employee than an independent contractor. Control includes factors such as instructing the worker when and where to do work, specifying what tools to use or where to buy tools. Employees receive detailed instruction and employers may have evaluation systems in place to measure the end result of their work. Also employees often receive job training that specifies procedures and methods to be used. This is true whether the training is periodic or ongoing.
How Does Financial Control Affect Work Status?
Examples of financial control that would apply to employees are substantial investment in the worker’s equipment, reimbursed expenses, no opportunity for profit or loss, and method of payment, such as a regular wage for hourly, weekly or some other time period payment. Even when the employer supplements pay by commissions, workers are often employees. In contrast, independent contractors are typically not reimbursed for expenses, have opportunities for profit or loss, and can freely seek out business opportunities. They generally also receive a flat fee for a job.
How Does Relationship Determine Work Status?
How the worker and business interact differs for employees and independent contractors. A written contract can state the worker’s status but even so, a contract alone is not sufficient to determine the working relationships and whether a worker is an employee or independent contractor. When a worker receives benefits, such as insurance, a pension plan, vacation or sick pay, these factors usually indicate an employee relationship. Employee relationships tend to be permanent or long lasting rather than a work relationship that dissolves after a project is completed. The service a worker provides and whether the worker is a key aspect of the regular business of the company is also a factor.
If you have questions about determining work status, seek legal assistance.
Stephen Hans & Associates https://hansassociates.com/ provides decades of experience to business owners regarding employment related issues.