Employee vs Contractor – which is the right classification?
As a business owner, you may be managing a few special projects that may require hiring an expert. Many situations, employers classify contractors as employees and vice versa without understanding the primary criteria that the Internal revenue service uses to distinguish employees vs independent contractors.
So, how do you know if you need to classify them as an employee or a contractor? The following are the basic rules :
- Relationship: How the employee and the business perceive the business relationship plays a very important rule in the classification eg:
- Does the contractor provide any specialized services or has expertise?
- Does the contractor claim similar benefits as regular employees like insurance etc?
- Are there any clearly defined scope, responsibilities contract between the contractor and the business.
2. Financial control: A very important factor in determining contractor vs employee is the level of control between the contractor and the business.
- Do contractors use their own tools/equipment in performing services?
- Opportunity for profit or loss indicates the existence of a contractor type of relationship.
- How contractors are paid? Are they paid a flat fee or similar arrangement as stated in the contract?
- Does the contractor claim unreimbursed business expenses?
3. Behavioral control:
- Do they work independently or do they receive instructions on how to perform the work by their supervisor?
- Do they receive training similar to employees?
- Evaluation methods that are being used to measure employee performance? Are they the same for contractors and employees?
IRS has a special form of SS8 that can be reviewed to determine the status of the employee. In addition, for more information, you can contact us via our contact form here
https://www.irs.gov/instructions/iss8
Compliances
Employees: All employees will need to be issued W2s. Employers are required to file all the payroll reports 940,941 etc.
Contractors: All contractors are issued 1099s end of the year based on the work completed.