Independent Contractor or Employee Guidelines

Independent Contractor or Employee Guidelines

Prior to hiring an independent contractor, rather than as an employee, you should carefully review the criteria below to be certain the individual is being classified properly. Misclassification can open our company to substantial liability both to the person hired and to various government agencies.

Internal Revenue Service (IRS) Rules

To determine whether an individual is an employee vs. independent contractor, the relationship of the worker and the business must be examined. In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. Facts that provide evidence of the degree of control and independence fall into three categories:

Behavioral Control. Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:

  • Instructions that the business gives to the worker. An employee is generally subject to the business’ instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.
    • When and where to do the work.
    • What tools or equipment to use.
    • What workers to hire or to assist with the work.
    • Where to purchase supplies and services.
    • What work must be performed by a specified individual.
    • What order or sequence to follow.

The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.

  • Training that the business gives to the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.

Financial Control. Facts that show whether the business has a right to control the business aspects of the worker’s job include:

  • The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their employer.
  • The extent of the worker’s investment. An independent contractor often has a significant investment in the facilities or tools he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.
  • The extent to which the worker makes his or her services available to the relevant market. An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.
  • How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is often paid a flat fee or on a time and materials basis for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
  • The extent to which the worker can realize a profit or loss. An independent contractor can make a profit or loss.

Type of Relationship. Facts that show the parties’ type of relationship include:

  • Written contracts describing the relationship the parties intended to create.
  • Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.
  • The permanency of the relationship. If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship.
  • The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

Either an employer or a worker may request that the IRS determine whether the worker is an employee or a contractor by submitting Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, to the IRS. Additional resources for determining worker status are available on the IRS website or by calling the IRS at 800-829-3676 (800-TAX-FORM).

For More Information

For more information regarding contractors vs. employees, please contact Next Generation Payroll a local black-owned business in Dallas. We are one of the top payroll processing companies based in Dallas, TX however, we provide multiple services that are designed to create a level playing field for local businesses to thrive in a global economy. In other words, our services are centered around risk management, operational efficiency, and strategies that improve market penetration by improving business opportunity leads. We build up small businesses making sure your business is solvent, and it operates efficiently in all economic climates.

At Next Generation Payroll, we are not interested in fulfilling quotas and meeting monthly sales goals. We focus on goals that are centered around fulfilling our client’s aspirations. Our top priority is to simply provide a strategy to help your business reach full potential. For more information, feel free to reach out to us at 214-396-2200. Stay in touch with us by signing up below for our monthly updates and newsletters



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