Independent Contractor Status
Employees Versus Independent Contractors
By Stan Soper, guest expert, Hypermart, Inc.
If you hire someone for a long-term, full-time project or a series of
projects that are likely to last for an extended period, you must pay
special attention to the difference between independent contractors
Why It Matters
The Internal Revenue Service and state regulators scrutinize the
distinction between employees and independent contractors because many
business owners try to categorize as many of their workers as possible
as independent contractors rather than as employees. They do this
because independent contractors are not covered by unemployment and
workers' compensation, or by federal and state wage, hour,
antidiscrimination and labor laws. In addition, businesses do not have
to pay federal payroll taxes on amounts paid to independent
If you misclassify an employee as an independent contractor, you may
end up before a state taxing authority or the IRS. Sometimes the issue
comes up when a terminated worker files for unemployment benefits and
it's unclear whether the worker' was an independent contractor or
employee. The filing can trigger state or federal investigations that
can cost many thousands of dollars to defend, even if you successfully
fight the challenge.
The Difference Between Employees and Independent Contractors
Independent contractors are individuals who contract with a business
to perform a specific project or set of projects on an independent
basis. Employees provide work in an ongoing, structured basis. The
IRS, workers' compensation boards, unemployment compensation boards,
federal agencies, and even courts all have slightly different
definitions of what an independent contractor is, though their means
of categorizing workers as independent contractors are similar.
Who Qualifies as an Independent Contractor?
One of the most prevalent approaches used to categorize a worker as
either an employee or independent contractor is the analysis created
by the IRS. The key issues are how much control the employer has over
the worker and the way in which the worker performs his or her job.
The IRS considers the following:
What instructions the employer gives the worker about when, where and
how to work. The more specific the instructions and the more control
exercised, the more likely the worker will be considered an employee.
What training the employer gives the worker.
generally do not receive training from an employer.
The extent to which the worker has business expenses that are not
Independent contractors are more likely to have