by Michael Cieri, CPA
Business taxpayers frequently prefer to treat workers as independent contractors, rather than as employees. Independent contractors must pay their own payroll taxes and benefits. And they lack non-tax protections that apply to employees. But a business cannot simply decide that a given worker is an independent contractor. The facts are what matter, for tax purposes and otherwise. And penalties apply for incorrectly classifying workers. Here is information to help distinguish employees and independent contractors for tax purposes.
An independent contractor:
- Operates under a business name
- Has his/her own employees
- Maintains a separate business checking account
- Advertises his/her business
- Invoices for work completed
- Has more than one client
- Has own tools and sets own hours
- Keeps business records
- Performs duties dictated and controlled by others
- Receives training for work to be done
- Works for one employer
There is no single test for determining if an individual is a contractor or an employee. Instead, consider the following guidelines:
- The extent to which the services rendered are an integral part of the principal’s business
- The permanence of the relationship
- The amount of the prospect’s investment in facilities and equipment
- The nature and degree of control by the principal
- The prospect’s opportunities for profit and loss
- The amount of initiative, judgment or foresight in open market competition with others that is required for the success of the prospect
- The degree of independent business organization and operation
Whether a person is an independent contractor or employee generally depends on the amount of control exercised by the employer over the work being done.
John Schachter + Associates Inc. helps clients properly classify workers and to plan for optimal compensation of both independent contractors and employees. Please let us know if we can help you!