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Independent Contractor vs. Employee

Don’t know whether you are paying an independent contractor or employee for their services? Here are a few tips to help you decide what classification the recipient falls under and what forms are required for each.

The relationship between you and the person providing the services is the key to determining how he/she should be classified. The more control you, the employer, have over the process of providing a service the more likely the individual will be considered an employee. The employer must evaluate its degree of control in three areas: behavioral control, financial control, and the type of relationship that exists with the service provider.

IRS Publication 937 provides a list of 20 factors that help to determine whether an individual is an employee or independent contractor. These factors are only guidelines and some may not apply to all business relationships. The following chart lists these factors:

	Employee	Independent Contractor
Instruction	Employer controls process by which service is accomplished.	Employer can only control result or outcome of service, not the means by which it is done.
Training	Trained by employer to perform services as directed.	Use own method of performing service. No training by employer.
Integration	Services provided are essential to the success of the business.	Continuation of business is not dependant on services provided.
Services Rendered Personally	Yes	No
Hiring Assistants	Works for employer who hires, supervises, & pays workers.	Can hire, supervise, & pay assistants. Only responsible for result of services performed.
Continuing Relationship	Has continuing relationship with employer, even if work is performed at irregular intervals.	Does not have continuing relationship with employer.
Set Hours of Work	Employer establishes number of work hours.	Sets his/her own work hours.
Full-Time Required	Employer may require full-time work schedule for employee.	Can choose who to work for and when work will be performed.
Work Done on Premises	Works on employer’s premises or location specified by employer	Can choose where work will be performed.
Order of Sequence	Employer may require work to be performed in specified order of sequence.	Work may be performed in any order the individual believes to be most efficient.
Reports	Employer may require reports to be submitted by employee.	Not required to submit reports to employer.
Payments	Typically paid by the hour, week, or month	Paid by the job or straight commission
Expenses	Business & travel expenses paid by employer	All expenses paid by the individual.
Tools & Materials	Employer typically provides tools, materials, and equipment necessary to perform work.	Individual supplies his/her own tools, materials, and equipment.
Investment	Does not hold investment in facility used to perform services.	Has significant investment in facility used to provide services for employer.
Profit/Loss	Does not realize profit or loss as result of business performance.	May realize profit or loss based on performance of services.
Works for Multiple Persons or Firms	Only works for employer.	May provide services for more than one person or firm at a time.
Services Offered to General Public	No	Yes
Right to Fire	Employer may fire employee at any time.	Cannot be fired if contract specifications are being met.
Right to Quit	Yes	Must complete responsibilities agreed upon in the job contract.

If classified as an employee, the employer is required to withhold income tax, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes. The employer must also issue a Form W-2 and provide a copy to each employee for which wages were paid in the applicable tax year. An employer is not required to withhold or pay taxes for money paid to independent contractors; however, a Form 1099 must be issued for services costing over $600 provided by an unincorporated business. It is also important that employers have independent contractors fill out Form W-9 Request for Taxpayer Identification Number and keep it on file when Form 1099s are issued.

It is very important to properly determine the relationship that exists between an employer and a service provider. An employer could be held liable for employment taxes and subject to penalties if the IRS determines that an independent contractor should be classified as an employee. State governments also like to keep a close eye on employers and are eager to collect taxes when employees are mistakenly classified as contractors. The Ohio Department of Job & Family Services (state unemployment) and Ohio Bureau of Workers’ Compensation are two state organizations that often investigate the classification of service providers.

If still unsure whether you are paying an employee or independent contractor, our office would be happy to answer your questions and assist you in making this decision. Our phone number and office hours can be found on the website’s homepage.