IRS Tip: Contractor vs. Employee

General Real Estate Investing
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Independent Contractor vs. Employee

Are your workers independent contractors or employees? The answer can have a profound impact on how much tax you pay as a small business owner. Knowing whether your workers are or are not employees will affect the amount of taxes you must withhold from their pay. It will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.

Employers who misclassify workers as independent contractors can end up with substantial tax bills as well as penalties for failing to pay employment taxes and failing to file required tax forms. Workers can avoid higher tax bills and lost benefits if they know their proper status.

Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

Generally, whether a worker is an employee or an independent contractor depends upon how much control you have as a business owner. If you have the right to control or direct not only what is to be done but also how it is to be done then your workers are most likely employees. If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.

Three broad characteristics are used by the IRS to determine the relationship between businesses and workers - Behavioral Control, Financial Control, and the Type of Relationship. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

Knowing the proper worker classification can be critical to your business. Don’t guess. Act now to make certain you know for sure.

You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, and Publication 1779, Independent Contractor or Employee. Both of these publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).

Remember that for the genuine IRS Web site be sure to use .gov. Don’t be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.

Links:

http://www.irs.gov/businesses/small/article/0,,id=99921,00.html
Publication 1779
Publication 15-A

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just in case you’re wondering, the penalty for mis-classification falls on the employer. 100% of FICA, Medi, Employee’s FICA, Employee’s Medicare and Employee’s FIT that should have been withheld. Plus penalties and interest.

And a little blood.

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I am hearing you loud and clear.

Is it okay if a contract worker becomes an employee? If we decide they are worth keeping? If someone immediately is an employee, they can get unemployment if let go, correct?

Furnishedowner

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Generally the legal definition of a Contractor is a person doing work for another who is NOT under control of hiring person as to when or how he does his work, whether alone or with helpers, what tools to use, etc.

Control is the biggie.

Whenever I have anybody do any work on any property I own, I type up and have that person sign a little agreement that he/she is NOT under my control and is an independent contractor and is NOT covered by my insurance for any accidental injuries that might be suffered on the job.

But in some instances, such as a RE Agent working in my RE Brokerage co., the state has passed a law making me carry Wrkrs Comp ins. on him/her so in that instance, control doesn’t exempt me from that…but if he/she were to have a car accident he/she’s strictly on his/her own and I’d contest any claim of agency or my liability unless the REA was doing something personal for me.

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presence of a contract is not a determining factor.

you can have a contract that says whatever you agree it will say, but if the person

  • shows up at your place of business,
  • works according to your schedule,
  • uses your tools and equipment,
  • cannot sub out the work to their brother-in-law (must personally perform the service)
  • gets paid by the hour rather than by the job
  • has no investment/ cannot incur a loss

then IRS will determine that this is your employee. You are correct that it comes down to control; and a contract is not evidence of control.