Important Information for Business Owners
As a business owner, it
is important that you know how to treat payments you make for services. Is a
person who is working for you an employee or an independent contractor? There
are consequences if you do not properly classify these work relationships.
Please take a moment to read the following information and determine how it
impacts your circumstances.
Employee or
Independent Contractor
A person is your employee if you
control what work will be done and how it will be done. As the employer, you
must withhold for income taxes (Federal, state, in some cases Ohio school
district, and city), withhold and pay Social Security and Medicare taxes, and
pay unemployment taxes on wages paid to an employee. An independent
contractor (someone who is self-employed) will contract to do work for you
according to his own methods and who is not subject to control (how the work
will be done) except as to the results of such work. Generally, you will not
have to withhold taxes from the individual’s pay. Examples of independent
contractors would be lawyers and accountants who perform services for you,
cleaning services, functions you outsource, etc.
20 Factors Distinguishing
Employee Status from Independent Contractor Status
Specific factors that are used by the IRS in
determining whether an individual is an employee or an independent contractor
are listed below. This listing is commonly referred to as the "20 factors"
test.
- Worker is required to
comply with instructions about when, where, and how work is done.
- Worker needs to be
trained.
- Worker's tasks are
integrated into normal business operations.
- Worker's services must
be personally rendered.
- Worker is not
responsible for hiring, paying, or supervising assistants.
- Worker has continuing
relationship with "employer".
- Working hours are set by
"employer".
- Worker is required to
devote full-time efforts to "employer's" business.
- Worker must perform or
execute duties on "employer's" premises.
- Worker's services must
conform to order or sequence set by "employer".
- Worker is required to
submit regular oral or written reports.
- Worker's payment is
based on time spent instead of by the job.
- Worker is reimbursed for
travel and other expenses.
- Worker is furnished
tools, materials, and other equipment by "employer".
- Worker has no
significant investment in facilities (such as an office).
- Worker has no risk of
real economic loss.
- Worker is not working
for more than one "employer" at a time.
- Worker does not make
services available to the general public.
- Worker is subject to
discharge without "employer" penalty -- even if job specifications are met.
- Worker can terminate
relationship with "employer" without worker liability.
Note: "Yes" answers are indicative of
employee status per IRS Revenue Ruling
If you have an
employer-employee relationship, it does not matter if you call it something else
(independent contractor), the substance of the relationship, not the label,
governs the worker’s status. As a business owner, it is less of a tax burden if
a worker’s relationship with you is that of an independent contractor, and not
as an employee. Some may try and say a person is not an employee in order to
avoid the tax requirements. If the conditions are met that establish an
employer-employee relationship, you are liable for the various taxes.
For more help
in determining whether a person who works for you is an employee or independent
contractor, get IRS publication 15a.
