Employee or Independent Contractor
by Pat Hill
How do you know if a worker is an employee that you must withhold taxes for or an independent contractor who is responsible for his own taxes? In order to determine whether someone who does work for you is an employee or an independent contractor, you need to evaluate several factors regarding your relationship with the worker. When evaluating these factors, keep in mind the nature of the job and how your industry usually handles such situations. This information will guide you in determining the worker's role. In general, the more control you exercise over the worker, the more likely it is that he is an employee.
Do you control when and where the person does their work?
Does the worker use your tools and equipment or his own?
Is the worker able to hire others to assist with the work without your approval?
Does the worker purchase the necessary supplies and services at a place of his own choosing?
Do you determine what specific tasks are to be done by what specific worker?
How much guidance do you provide the worker about how to do the job?
Do you pay the worker a flat fee or an hourly rate?
Do you provide the worker with benefits such as health insurance or paid time off?
Do you reimburse the worker for expenses that are incurred to get the job done?
Does the person perform the same services for others?
Do you have a written agreement with the person regarding the work to be done?
Will the person work for you indefinitely or just until a certain job is completed?
Is the work the person does an integral aspect of your business or is it ancillary?
Each of the above questions addresses the degree of control you have over the worker. Remember to consider each of these factors in light of the normal practices for the given industry. For example, it is more common for a trade worker who is an employee to use his own tools than for an office worker who is an employee to provide his own office equipment. No single factor is determinative.
Several factors may indicate a degree of control even though the person is an independent contractor. An example: You hire a plumber to install new fixtures when remodeling your home. You require the job to be done at a certain time and at a certain place. You pay an hourly rate and reimburse for expenses. All of these factors indicate a certain degree of control, but the person is still an independent contractor. After all factors are considered, the control is with the worker.
For more help in determining whether a person who works for you is an employee or independent contractor, get IRS publication 15a.