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By Jeffrey L. Marcus*
November 2004


Business owners faced with anxieties of operating a business are confronted with many issues. This article will address an important issue sometimes overlooked. Whether a worker is an employee or an independent contractor is important and can have significant tax penalty implications on the employer if categorized incorrectly. If your worker is an employee, you generally withhold income taxes and withhold and pay Social Security, Medicare, and unemployment taxes on his or her wages. You generally do not withhold or pay these taxes on payments to independent contractors.

Additionally, the classification may affect eligibility for employee benefits. Employees may be eligible for workers’ compensation, unemployment benefits, insurance and retirement benefits, while independent contractors need not be covered.

Defining the Business Relationship

Whether a worker is an employee or independent contractor depends on issues of control and independence. Generally a worker is considered an independent contractor if the employer has the right to control or direct the result of the work, but not the means of accomplishing the result.

Control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties.

Behavioral Control includes whether the business has the right to direct and control how the work is done through instructions, training, or other means.

Financial Control includes factors showing whether the business has a right to control the financial and business aspects of the worker’s job, including:

The extent to which the worker has unreimbursed business expenses,

The extent of the worker’s investment in the tools used in performing services,

The extent to which the worker makes his or her services available to others in the relevant market,

How the business pays the worker, and

The extent to which the worker can realize a profit or incur a loss.

The type of relationship includes:

Written contracts describing the relationship the parties intended to create,

The extent to which the worker is available to perform services for other similar businesses,

Whether the business provides the worker with employee benefits, and

The permanency of the relationship, and the extent to which services performed by the worker are a key aspect of the regular business of the company.


The classification of a worker as an independent contractor or employee is often a difficult one. Improper classification can have drastic legal implications.

*Jeffrey L. Marcus, Esq. provides litigation services and transactional advice to the firm’s clients.  He has more than 14 years’ experience in private and corporate practices involving business transactions and real estate.  Mr. Marcus can be contacted at jeff@marcuslawgroup.com or at the above address/telephone number.

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