TOP DRAWER ARTICLE

Independent Contractor - or Employee?
by
HL Carpenter

As the economy begins looking up, you realize you need some help in your business. Instead of hiring an employee and incurring FICA, Medicare and unemployment taxes, you're thinking of paying the new person as an independent contractor. But is that truly the right classification for your worker?

Since misclassification could lead to penalties and the payment of back taxes, you'll need to take time to reach the right answer. So how do you decide whether someone is an employee or an independent contractor?

According to the Internal Revenue Service, the determination depends on the financial and behavioral control you have over the worker, as well as your business relationship with him or her. As a general rule, you can consider someone an independent contractor if they have their own business, or if they control the way they perform work for you.

For example, when you use the services of a bookkeeper who has an office and performs the work on his own schedule, you can most likely consider that person an independent contractor.

On the other hand, when you hire a bookkeeper at an hourly rate to work in your office using your computer and calculator, you have an employee.

If you're not sure how to classify a worker, ask your tax advisor for a list of questions the IRS uses, or visit the IRS web site. You can also have the IRS make the decision for you, using Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Originally published January 2010.

Last update: January 8, 2011