Before you hire a worker for your business you have to decide if they will be an employee or hired as an independent contractor. How do you tell the difference between the two?
Here are three things that must be considered to correctly determine and classify the relationship between a worker and the business.
Behavioral Control
Evaluate the who controls the worker and how the work is completed. Do you give the worker a task and the steps necessary to complete the task? Do you hire a specialized worker to complete the task without direction?
Financial Control
Evaluate who is financing the work. Does the company own the supplies, tools and materials used or are they provided by the worker? How is the worker paid for example, by the hour with a regular paycheck or by an invoice after the work is complete? Also, does the worker have a financial burden involved in the task or are expenses reimbursed to them?
Relationship
Evaluate the relationship between the worker and the business. Is there a contract for a specific task? Does the worker do the same work for other businesses? Does the worker complete the work as an ongoing part of and only for the business? In addition, are benefits provided to the worker in the form of insurance, vehicles, holiday pay and other fringe benefits?
This is a topic that the IRS does not take lightly so it is very important to understand and follow these guidelines. Using the wrong classification can be unintentional or allow you to avoid certain responsibilities. However, treating an employee as an independent contractor is not fair to them and it could lead to an unpaid employment tax liability for the business. Therefore, using the correct classification is a much better option for the worker and your business.
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