One of the first questions you have to answer when hiring someone is whether that person will be classified as an employee or independent contractor. Many business owners think that by hiring workers as independent contractors, they can avoid paying payroll taxes or making workers compensation contributions; however, the title of the relationship isn’t important. They key to the relationship is control. Does the employer or the employee have control? The IRS will consider three facts:
- Behavior: Who controls what the worker does and how the worker does her job?
- Finances: How is the worker paid? Is it hourly, commission, or based on something else? Are expenses reimbursed? What about mileage? Who provides the tools and supplies to the worker?
- Relationship: What does the employment contract say? Is there a contract? What type of benefits such as insurance, retirement, and vacation pay are offered? What is the duration of the relationship?
There is no chart, matrix, or magic number available, since each situation is unique. The key here is to look at the total employment relationship, and determine the extent of control over the worker. Documenting each fact used to make this determination can be helpful if the IRS ever comes calling.
The IRS website has a whole page of information related to this topic, and will even make the determination for you. If anything, err on the side of caution. Paying back taxes is much harder than receiving a tax credit.