Businesses can pay employees or independent contractors to carry out tasks. However, the two carry important legal differences. Employees require the employer to withhold tax, social security and medicare payments. They are also protected under employee labor laws.
Independent contractors, on the other hand, are required to pay their own taxes. Employee labor laws also do not apply to independent contractors. These are the ten distinguishing factors the IRS uses to determine whether an associate is an independent contractor or an employee. Ensure your business is meeting its legal obligations. If you happen to fall afoul of the law, these tax attorneys can appeal IRS penalties on your behalf.
Business Ownership
Independent contractors often set themselves up as sole proprietors for their business. In this capacity, they may provide the same service for multiple clients. Your relationship with a contractor is, therefore, a business-to-business relationship, instead of a business-to-employee relationship.
Finances
The IRS looks at the nature of payments to determine if an associate is an employee or a contractor. They look at things like whether your business controls when and how the associate is paid, who provides the tools/equipment, and whether expenses are reimbursed.
Hiring Practices
Employees typically fill an application form and go through a hiring process. Contractors usually interact directly with the department they will be working with. They might complete a proposal, but do not usually go through the hiring process.
Training
Employees typically undergo some form of training once they join the company. However, independent contractors often arrive with the necessary industry expertise to excel in the position. As a client, the business is not responsible for their training.
The Nature of the Relationship
The IRS will look at the nature of the relationship between the associate and the employer. They will look for elements of the relationship that could indicate an employee/employer relationship, like a pension plan, insurance, paid time off, etc.
Tax Documents
Employees provide employers with their name, address and social security number, as well as a completed W-4 with their filing status and tax exemptions. Meanwhile, contractors provide their taxpayer identification number and a W-9 form.
Marketing
Because contractors are free to provide their services to other clients, the IRS will look for signs that they are marketing their services to other clients for other job opportunities.
Payment Schedule
An employee earns a yearly salary or an hourly wage, but contractors often receive a total amount for the work completed by a specific date. They might receive this as a lump sum when the job is completed.
Flexible Working Hours
Unlike an employee, whose hours are determined by the employer, the contractor works for themselves and has more flexibility over their work schedule. They may keep their own hours provided they complete the work assigned.
Invoices
An independent contractor provides the employer with an invoice for work completed. The previously agreed statement of work will determine the payment schedule after the invoice is submitted. Employees do not submit invoices and payment periods remain the same from weeks to months.
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