How to distinguish between an employee and an independent contractor



How to distinguish between an employee and an independent contractor

For tax purposes classification matters

The Internal Revenue Service has laid down specific guidelines that explain how to distinguish between an employee and an independent contractor. At times, these guidelines still do cause some consternation, for both employers and for employees.

While some will tell you that the «terms» employee and employer do not necessarily govern the relationship, you should consider having your contracts reviewed by a tax accountant or lawyer before sending them to your freelance clients. Why run the risk?

The Internal Revenue Service website states the following ruling: » Independent Contractor: The general rule is that an individual is an independent contractor if (the person for whom the services are performed) has the right to control or direct only the result of the work, and not what will be done and how it will be done or method of accomplishing the result.»

«People such as lawyers, contractors, subcontractors, public stenographers, and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case.»

Here are some steps you can take to distinguish whether you will be considered an employee or an independent contractor.


Instructions

Step 1

Who controls the work being done

Employee: If the employer controls the work that is being done (e.g. how it is done and what is done) then you are considered an employee.

Independent contractor: If your client tells you what must the end result is but does not instruct you as to how to get to that end result, you may be considered an independent contractor.

Step 2

Who supplies the equipment

Employee: If the tools that you require to complete the job are supplied by a business, then chances are that you will be considered an employee.

Independent contractor: If you are responsible for having (or obtaining) the equipment or tools that you need to complete an assignment then you may be considered an independent contractor.

Step 3

Written contracts

While your written contract may clarify the proper terms (e.g. employee or independent contractor) the Internal Revenue Service does not have to «honor» the contractual language.

Generally speaking the IRS will make a determination based on the entire relationship between the two parties in deciding if the relationship is one of an employer/employee or business/independent contractor.

Step 4

Nature of relationship issues

The nature of a relationship can also impact how the Internal Revenue Service believes that your work should be classified. Here are some «key» factors in making that determination:

Length of time of contract — if you are going to be working over an indefinite period of time with a single business your relationship may be classified as that of an employer/employee;

Business importance — if the work that you are doing for a business is critical to the long term standing of that business, you may be considered an employee rather than an independent contractor;

While these are only a couple of the factors that can influence how your relationship is classified, there may be others that will be taken into consideration.

Step 5

Contractor concerns

It is a good idea to have all contracts for independent work reviewed by a tax professional to ensure that you are not being misclassified. If you have been classified as an independent contractor and believe that you should be classified as an employee, you may be able to request a review of your status through the IRS.


Things Needed
• Contract that explains relationship
• Basic knowledge of tax rules
• Understanding who controls work
• Understanding how payments are made
• Knowing who is responsible for taxes

Tips & Warnings
• Long term clients may result in your being misclassified
• Payment guarantees from freelance sites may violate the «intent» of the relationship
• In most cases those who offer their services to the public via their own business are not considered employees
• Independent contractors must file Self Employment tax forms

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