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 and employees.

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 contractors.

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.

Independent contractors generally do not receive training from an employer.
The extent to which the worker has business expenses that are not reimbursed.
Independent contractors are more likely to have unreimbursed expenses.