Is the New Worker an Employee or an Independent Contractor?



For most employers, the question of whether your new worker is an employee or an independent contractor can be difficult to answer.  This is probably the most frequently asked question for Lucrum, no questioning it’s in the top 3. There are many factors to consider when making this distinction but whether you are able to afford adding another headcount to your payroll is not one of the factors.  The determination should be based upon the details of your business relationship with the worker.  The decision is mainly based upon how much control the company has over the worker.  Here is a chart which may be useful:

Employee

Independent Contractor

  • Company dictates when, what and how to do work or provides training.
  • Company reimburses worker or provides supplies and tools.
  • Worker works for only your company.
  • Services performed by worker are considered the business of the company.
  • Worker has own training and determines how work is done.
  • Worker has own tools and supplies and is not reimbursed.
  • Worker works for other companies in addition to yours.
  • Services performed by worker are ancillary aspects of the business of the company.

Written documentation of the factors used in your decision should be maintained in files in the event of an audit.  If there is no reasonable basis for treating a worker as an independent contractor, you may be responsible for taxes and penalties.  For a more detailed list than the above summary, our 1099 vs W-2 checklist should help. If you are still unsure and need to get a professional determination, form SS-8 can be filed with the IRS.  It may take up to six months to get a ruling, but any doubt will be removed.

All independent contractors must fill out a W-9 form, which provides the name, address and taxpayer identification number (think EIN or SSN) of the contractor.  This form should be maintained in a file.  Workers who are independent contractors and paid $600.00 or more during the year must be provided with a 1099-Misc form by January 31st of the following year.  And information about all independent contractors paid $600 or more is due to the IRS by the end of February of the following year.  These forms are not difficult to fill out if the information is obtained throughout the year; there  are some electronic filing options which may be beneficial and save time.

If you are unsure of whether you have an employee or an independent contractor, please call us.  We will assist you in making the determination.  And also, if you would like assistance in filling out the 1099 forms we can help with that as well.  The time to think about the reporting is now – not just at the end of the year.