Independent Contractor or Employee?
Many small businesses mistakenly believe that the classification of a worker as an independent contractor or employee depends on the age of the worker, or whether the worker is employed part time, full time or for a temporary assignment. Other employers believe that the classification of a worker is a choice that can be made by the worker or employer. It is important for business owners to understand that none of these positions is correct and that they must look to the law to determine whether a worker is an employee or independent contractor.
The general rule is that a worker who performs services is an employee if the business has control over what will be done and how it will be done by the worker. Independent contractors are generally workers in an independent business or profession who offer their services to the public. Examples of independent contractors are doctors, dentists, lawyers, plumbers, contractors and electricians.
The following factors will help an employer determine if a worker is an independent contractor or an employee.
- Behavioral control: Does the employer control or have the right to control what the worker does and how the worker does it? If the employer controls the details of the work to be performed, the worker is an employee.
- Financial control: Does the employer direct or control the financial and business aspects of the worker’s job? Some examples of financial control include: Does the employer control how the worker is paid? Does the employer reimburse the worker’s business expenses? Does the employer provide the tools and supplies needed to perform the work? If the employer has financial or business control over the worker, the worker is an employee.
- Relationship of the Parties: Is the worker eligible for, or participate in, employer benefit plans such as pension, insurance or vacation? Will the relationship between the employer and the worker continue? Is the work performed the key aspect of the business? If the answer to these questions is yes, the worker is an employee.
An employer has an incentive to misclassify a worker. If the worker is an independent contractor, the employer is not required to withhold income and social security/medicare taxes from the worker. Additionally, the employer is not liable for its share of social security/medicare taxes, unemployment taxes or workman’s compensation insurance.
An employer who misclassifies workers without a reasonable basis, however, runs the risk that the IRS will reclassify the worker as an employee. If the IRS does so, the employer will be liable for the employment taxes for that worker. The Florida Department of Revenue can also audit an employer to determine whether workers have been properly classified. If the DOR determines that the worker was misclassified as an independent contract, it can require the employer to pay the unemployment tax for the misclassified worker.
Employers who have misclassified their workers as independent contractors, and meet eligibility requirements, may participate in an IRS program which provides them an opportunity to reclassify the worker as an employee for future employment taxes. The program provides the employer partial relief from federal employment taxes of the misclassified workers.
Workers who have been classified by their employer as independent contractors are required to pay their share and the employer’s share of social security/medicare taxes. Workers who believe they have been misclassified as independent contractors by their employers have the right to pay only their share of the social security/medicare tax. IRS Form 8919 is used for this purpose.