CONTRACTOR OR EMPLOYEE?
By Jeffrey L. Marcus*
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
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
Written contracts describing the relationship the parties intended to
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
The classification of a worker as an independent contractor or employee is
often a difficult one. Improper classification can have drastic legal
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 firstname.lastname@example.org
or at the above address/telephone number.