Employee or independent contractor?
The wrong choice now can provide potentially serious problems for the owner and company further down the road. But it’s sometimes not easy to draw a clear distinction between the two classifications.
The definition as to what constitutes an employee and what makes an independent contractor can often seem ambiguous and murky. Even the IRS has applied its own rules inconsistently at times — doing nothing to lessen the overall level of confusion.
But like it or not, the owners will always hold ultimate responsibility for the people they hire and if, in the eyes of the IRS, an employee must be reclassified, there can be serious financial repercussions.
The reclassification of an existing independent contractor to employee status may not only create assessments (and eventually payment) of the newly reclassified employee’s share of payroll taxes, fringe benefits, insurance, and more, but could also inflict additional interest and/or penalty charges onto the company.
Nothing is sacred. Even a qualified pension plan could fall prey to attack if “employees” who had mistakenly been treated as independent contractors were excluded from the plan’s coverage.
It’s a scary situation.
A checklistIt pays to be cautious — and help is available to the average owner-contractor.
A while back, the IRS published a list of considerations (a checklist of sorts) that employers can use as guidelines when attempting to determine whether the worker they’re considering is technically an employee or independent contractor. The documents are published by the Department of Treasury and offer vast and detailed information regarding employee and independent contractor description and classification.
If you own a computer, these documents are readily accessible. At the time of this writing I was able, via the web, to access, view, and download for printing most all of them for free at www.irs.gov/bus_ info/training.html, www.irs.gov/bus _info/sm_bus/operating.html, and http://ftp.fedworld.gov/pub/irs- ufl/emporind.pdf.
And there are more sites. You’ll find that once you land on one of these sites, you’ll have the option of branching off into a number of different directions. Simply read the instructions and click onto the links that you find appropriate for your question.
Eventually you’ll find what you’re looking for. Particularly helpful for me was IRS training packet #3320-102, “Independent Contractor or Employee — Training Materials.”
This packet pretty much answered any question I had regarding the independent contractor vs. employee debate. But if these addresses don’t take you to where you want to go, just go back to your favorite search engine and type in key words or phrases (such as “internal revenue service independent contractor classification”). If you’re persistent, you’ll eventually come across the information you seek.
Warning: Some of the documents were quite extensive. The first one I came upon, for the training packet mentioned earlier, pushed 60 pages. Make sure you have paper and ink — you could be downloading and printing for quite a while.
Of course, it you aren’t online or aren’t computer literate, you can also acquire copies of these documents via your local IRS agency or through the mail.
For convenience’ sake, I’ve plucked out and summarized some criteria that are pertinent to our industry. (See accompanying article.)
Of course, this is my summary; I’d strongly recommend you read the rules in their entirety and form your own interpretation.
Keep in mind, too, that virtually any criteria can be molded and altered according to individual circumstances and situations — even according to the temperament, knowledge, and experience of the agent doing the assessing.
Never take anything for granted. If an independent contractor arrangement is what you’re after, in addition to adhering as closely as possible to the IRS guidelines, it’s also likely going to be prudent to either create or acquire an independent contractor agreement that you can use to memorialize your installer’s relationship.
In short, get it in writing. (Ever heard that one before?) Have the worker sign a copy (get it notarized if possible) and keep it on file long after the worker has left your service.
Although these agreements may not necessarily be an absolute guarantee of employment status (and therefore may not protect you in case of an IRS audit), they can be useful in showing the intent of the parties. Also, just because you send out 1099s at the end of the year, don’t assume you’re covered. The IRS may not recognize a Form 1099 as evidence of independent contractor status.
Still unsure?In addition to the training materials, there is also an IRS publication titled 937 “Employment Taxes,” which provides examples of work classifications for industries such as building and construction.
But sometimes, even with the finest effort and the IRS guidelines in hand, the employee-or-independent contractor determination is still not clear-cut. Should you find yourself in this situation, your best bet may be to file an IRS Form SS4. The IRS takes the information rendered on this form and makes its own determination as to whether an employer-employee relationship exists.
Warning: You could be opening up a can of worms here. If you didn’t want an employee relationship and the IRS determines from your information that indeed an employee relationship exists, you could be locked in.
In the endOne thing is certain: If you’re an owner and the worker under your employ winds up classified as an employee, you will almost certainly be required to comply with all federal and state labor law statutes that are applicable to employees.
This includes paying out for federal and state payroll taxes, retirement, health insurance (including workers’ compensation insurance), and fringe benefit plans. Independ-ent contractors are generally responsible for their own retirement savings, fringe benefit plans, and federal self-employment taxes, and must report income and expenses on the federal Schedule C, Profit and Loss from Business come tax time.
Of course, with any employee or personnel situation of which you are unclear or concerned, it’s always a good idea to consult your own legal or tax advisor.
Sidebar: Employee or contractor?Here are just a few things to consider when attempting to determine whether your worker is an employee or independent contractor.
Payment: An employee is paid by the hour, week, or month; getting paid by the job or through a commission arrangement suggests an independent contractor.
Hours of work: An employee works the set times required by an employer; independent contractors set their own schedules.
Training: An employee must be trained to perform services in a particular manner; independent contractors normally use their own methods.
Hiring: An employee works for an employer who hires, supervises, and pays workers; independent contractors hire, supervise, and pay their own help.
Relationship: Work performed at frequently recurring, continuing, yet possibly irregular intervals may suggest employee status.
Hourly commitment: Full-time status might restrict a worker (employee) from pursuing other gainful opportunities. An independent contractor is free to work for whomever he or she chooses.
Location of work: An employee works on the employer’s premises or at routes or locations decided by the employer.
Sequence of work: If the job must be performed in a particular order or sequence set by the employer, this demonstrated control by the employer suggests employee status.
Reports: If a worker is required to submit reports that account for his/her actions, this can suggest employee status.
Expenses: If business and travel expenses are paid by the employer, this suggests an employee relationship. Independent contractors would bear their own expenses.
Tools and materials: An employee is furnished major tools, materials, and equipment by the employer. Independent contractors often provide their own tools, materials, and equipment, and often have a substantial investment in those items.
Profit and loss: Independent contractors can enjoy their own profits and suffer their own losses.
Working for more than one entity: An independent contractor may offer services to more than one firm at the same time; an employee will likely have an exclusive working relationship.
Advertising, promotion: Advertising services to the public would suggest independent contractor status.
Firing: An employee can be fired by an employer; generally, an independent contractor cannot be fired as long as s/he performs in accordance with the contracted agreement.
Quitting: An employee can generally end a working relationship at any time without incurring a personal or business liability.
Sidebar: PHCC board develops plan for ceo searchFALLS CHURCH, VA — The PHCC board of directors, at a meeting during the 2000 PHCC Spring Leadership Conference, approved a plan to hire a new chief executive officer.
The board agreed to contract with a professional search firm. Once the Executive Committee selects a firm, the search firm will be responsible for advertising, screening, and interviewing qualified applicants.
After completing the interviewing process, the selected search firm will recommend three finalists to the Executive Committee for consideration. The committee will then make a finalist recommendation to the board.
It is hoped that a new ceo will be hired at the June 23-24 board of directors meeting.