Builders and Contractors Exchange
Weekly Bulletin: 30 nov 2007
Are Your Workers Employees Or Independent Contractors?
By: Anne G. Bibeau
The answer can have a profound impact on your bottom line and how you run your business. With employees, you have to withhold taxes from their wages and provide workers’ compensation insurance. You may be liable for their negligence. Independent contractors, on the other hand, are just that: independent. They have to handle their taxes on their own and are usually on the hook for any injuries they cause. It’s important to determine which category a worker fits into because mistakes can be costly: treating an employee as an independent contractor may lead to substantial taxes and penalties, and treating an independent contractor as an employee may cause unnecessary administrative work for you and expose you to liability.
To determine which category a worker fits into, the IRS looks at three broad characteristics: behavioral control, financial control, and the type of relationship. The focus, with each factor, is on the degree of control you have over the worker.
Behavioral control refers to whether you can direct how the work is done. Can you give the workers instructions, decide what tools they use, pick which workers will do which tasks, or train them in how to do the work? The more control you have over how the job is done, the more likely the workers are employees. If you can only decide the end result, without telling the workers how to get there, then they are probably independent contractors.
You have financial control if you can direct the financial aspects of the worker’s job. Generally, businesses reimburse their employees for expenses, whereas expenses are part of an independent contractor’s investment in a project. Independent contractors often make other investments in a project, such as providing tools or facilities. Because an employee usually has no investment in a project, he or she cannot make a profit or loss. An independent contractor, on the other hand, lays out costs for a project and so stands to profit or lose on it. Independent contractors may also seek work from other businesses. Another question is how the worker is paid: an hourly wage, for example, may—though not necessarily—indicate an employee; independent contractors are typically paid by the project.
In examining the type of relationship, consider whether you treat the relationship as that of employer-employee or business-independent contractor. One indication is how the relationship is described in contracts. Another is whether you provide the worker benefits, like health insurance, vacation time, or a pension plan. If you intend that the relationship will continue indefinitely, the worker is more like an employee; independent contractors, on the other hand, are usually engaged for a specific project. Finally, if the type of work performed is a key aspect of your business, it’s likely that the worker is an employee.
The factors in the IRS’s test sometimes conflict. If you can’t decide whether a worker is an employee or independent contractor, ask an attorney for help.
Questions?
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.