Your Team: Self-Employed or Employees?
As a business owner, it is important to determine whether individuals working for you are employees or independent contractors (self-employed). Your determination is consequential – both financially and legally.
In general if your workers are employed by you, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid. However if they are self-employed and are working as independent contractors, you generally do not have to withhold or pay these taxes. If you are an independent contractor yourself and hire others, you will need to determine their status as well.
Before determining how to treat payments you make for services, you must first define the business relationship that exists between you and your worker. What is key is the degree of control and independence of that worker, and all information that provides evidence of this must be carefully considered.
The facts that offer evidence of the “degree of control and independence” fall into three categories:
- Behavioral – Does the company control (or have the right to control) what the worker does and how the worker does hisjob? A worker is an employee when the business has the right to direct and control the work. Note that the business does not actually have to direct or control the way work is done as long as the employer has the right to direct and control the work.
- Financial – Are the business aspects of the worker’s job controlled by the payor? Are there facts that show whether or not the business has the right to control the economic aspects of the worker’s job?
- Type of Relationship – Are there written contracts or employee benefits such as pension plan, insurance, vacation pay? Will the relationship continue and is the work performed a key aspect of the business?
Business leaders must weigh all of these factors when determining whether a worker is an employee or self-employed. Some may suggest “employee” while others suggest “contractor.” There is no formula or numerical ranking of factors that makes this exercise conclusive; rather all facts must be considered as no one factor stands alone in making the determination. It is essential that we consider the entire relationship, that we examine all evidence of “degree or extent of the right to direct and control,” and that we carefully document each factor used in making our determination.
If questions and doubt still remain after reviewing the three categories of evidence, and it is unclear whether a worker is an employee or independent contractor, you can file a Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) with the IRS. This filing can be made by either the business or the worker. The IRS will review the facts and circumstances and officially render a determination on your behalf.
As an interim step, we invite you to call on our team of HR professionals at Integrity HR. We have considerable experience in these matters, and can apply best practices used successfully in other businesses. Additionally, we can involve our legal resources as may be needed.
Misclassification of Employees
There are serious consequences for treating an employee as an independent contractor. If you do this, with no reasonable basis for doing so, you may be liable for employment taxes for that worker – and you should refer to Internal Revenue Code section 3509 for more information. If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes... but to get this relief you must file all required federal information returns on a basis consistent with your treatment of that worker. You must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977.
Workers who have reason to believe they have been improperly classified as independent contractors by an employer can use Form 8919 to report and calculate the employee’s share of uncollected Social Security and Medicare taxes due on their compensation.
General Guidelines
People such as lawyers, contractors, subcontractors and auctioneers who follow an independent trade, business, or profession in which they offer services to the public are generally not employees. However whether such people are employees or independent contractors depends on the facts in each case.
The general rule is that an individual is an independent contractor and self-employed if you, the person for whom the services are being performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.
Integrity HR can help with these and other important issues that affect your organization’s compliance, productivity, and profitability. Please call on us whenever we may be helpful.