Did you know that if you pay cash wages of $2,000 or more per quarter to someone working in or around your home, you generally should be withholding FICA tax (totaling 7.65%) from all wages that you pay? This does not apply to spouses, children under 21, parents (unless an exception is met) or employees under age 18 that are students. However, you may want to do some research on whether you might be an employer.
Many of our clients, whether they are small businesses or households, find themselves in situations where they question whether someone that they pay for services should be considered an employee. While paying someone as an independent contractor is less work and less expensive than the process of withholding taxes and filing payroll reports, that is not a determining factor for whether someone is your employee.
The IRS has given guidance on this issue. According to Common Law Rules, evidence regarding the degree of control and independence fall into three categories:
- Behavioral – Does the business have the right to direct or control how the worker does the work?
- Financial – Does the business have the right to control the economic aspect of the worker’s job?
- Type of Relationship – How do the worker and business perceive their relationship to each other?
For ease of determination of whether a worker is an independent contractor or an employee, most employers use the IRS 20-factor test:
- Level of instruction. If the company directs when, where, and how work is done, this control indicates a possible employment relationship.
- Training. Training workers indicates that employers exercise control over the way the results are accomplished.
- Degree of business integration. Workers whose services are integrated into business operations or significantly affect business success are likely to be considered employees.
- Extent of personal services. Companies that insist on a particular person performing the work assert a degree of control that suggests an employment relationship. In contrast, independent contractors typically are free to assign work to anyone.
- Hiring, supervising, and paying assistants. If a company hires, supervises, and pays a worker’s assistants, this control indicates a possible employment relationship. If the worker retains control over hiring, supervising, and paying helpers, this arrangement suggests an independent contractor relationship.
- Continuing relationships. Continuing relationships between workers and employers indicate that employer employee relationships exist. However, an independent contractor arrangement can involve an ongoing relationship for multiple, sequential projects.
- Set hours of work. People whose hours or days of work are dictated by a company are apt to qualify as its employees.
- Full-time required. If workers must devote full time to employers’ businesses, employers have control over workers’ time. Independent contractors are free to work when and for whom they choose.
- Doing work on employers’ premises. Requiring someone to work on company premises— particularly if the work can be performed elsewhere—indicates a possible employment relationship.
- Sequence of work. If a company requires work to be performed in specific order or sequence, this control suggests an employment relationship.
- Requirements for reports. If a worker regularly must provide written or oral reports on the status of a project, this arrangement indicates a possible employment relationship.
- Method of payment. Hourly, weekly, or monthly pay schedules are characteristic of employment relationships, unless the payments simply are a convenient way of distributing a lump-sum fee. Independent contractors are usually paid by the job or on straight commission.
- Payment of business or travel expenses. Independent contractors typically bear the cost of travel or business expenses, and most contractors set their fees high enough to cover these costs. Direct reimbursement of travel and other business costs by a company suggests an employment relationship.
- Furnishing tools and materials. Workers who perform most of their work using company-provided equipment, tools, and materials are more likely to be considered employees. Work largely done using independently obtained supplies or tools supports an independent contractor finding.
- Investment in facilities. Independent contractors typically invest in and maintain their own work facilities. In contrast, most employees rely on their employer to provide work facilities.
- Realization of profits or losses. Workers who can realize profits or losses (in addition to profits or losses ordinarily realized by employees) are independent contractors. Workers who cannot are generally employees.
- Work for multiple companies. People who simultaneously provide services for several unrelated companies are likely to qualify as independent contractors.
- Making services available to the general public. If a worker regularly makes services available to the general public, this supports an independent contractor determination.
- Control over discharge. A company’s unilateral right to discharge a worker suggests an employment relationship. In contrast, a company’s ability to terminate independent contractor relationships generally depends on contract terms.
- Right of termination. Most employees unilaterally can terminate their work for a company without liability. Independent contractors cannot terminate services without liability, except as allowed under their contracts.
If evidence shows that more of the factors indicate an employer-employee relationship, you likely should be treating that person as an employee.
Feel free to contact our firm for assistance in determining whether you are complying with employee withholding and reporting requirements. We can assist in setting up your payroll accounts or providing payroll services, or give you some helpful tips on how to ensure that you are hiring independent contractors to perform services for your household or your small business.
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