Independent Contractor And Employee IRS Guide
As so many states are cracking down on how employees are classified under Workers Compensation, I thought the best way to help would be to use the IRS’s definitions and interpretations of the differences between an independent contractor and an employee.
Independent Contractor (Self-Employed) or Employee?
It is critical that you, the employer, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.
Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be –
- An independent contractor
- An employee (common-law employee)
- A statutory employee
- A statutory non-employee
In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
Common Law Rules
Facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (These include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or an independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
Form SS-8
After reviewing the three categories of evidence, if you are still unsure if a worker is an employee or an independent contractor, the business can file Form SS-8 with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status.
Be aware that it can take up to six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form Form SS-8.
Employment Tax Obligations
Once a determination is made (whether by the business or by the IRS), the next step is filing the appropriate forms and paying the associated taxes.
Misclassification of Employees
Consequences of Treating an Employee as an Independent Contractor
If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker (the relief provisions, discussed below, will not apply). See Internal Revenue Code section 3509 for more information.
Relief Provisions
If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. See IRS Publication 1976, Section 530 Employment Tax Relief Requirements for more information.
Misclassified Workers Can File Social Security Tax Form
Workers who believe they have been improperly classified as independent contractors by an employer can use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report the employee’s share of uncollected Social Security and Medicare taxes due on their compensation.
References/Related Topics – Search these terms on the IRS Website
Worker Classification Webcast – A critical issue for all businesses is properly classifying workers as employees or independent contractors. The IRS’s archived Tax Talk Today Webcast, “What’s Hot in Employment Taxes: Independent Contractor or Employee?,” focuses exclusively on worker classification issues.
IRS Internal Training: Employee/Independent Contractor – This manual provides you with the tools to make correct determinations of worker classifications. It discusses facts that may indicate the existence of an independent contractor or an employer-employee relationship. This training manual is a guide and is not legally binding.
Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
Publication 15-A – The Employer’s Supplemental Tax Guide has detailed guidance including information for specific industries.
Publication 15-B – The Employer’s Tax Guide to Fringe Benefits supplements Circular E (Pub. 15), Employer’s Tax Guide, and Publication 15-A, Employer’s Supplemental Tax Guide. It contains specialized and detailed information on the employment tax treatment of fringe benefits.
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulation, and Official Guidance Page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.
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