It is critical for business owners to correctly determine the status of service providers as employees or independent contractors. In making this determination, you must first understand the relationship between your business and the service provider as it relates to the degree of control and independence.
Internal Revenue Service (IRS) guidelines identify three categories of attributes that provide evidence regarding the nature of this relationship as follows:
- BEHAVIORAL: Employee/Employer relationships generally involve more control over the work performed and the manner in which it is performed including the type of work, the location where the work is conducted, and the timeframe in which it must be carried out.
- FINANCIAL: The financial aspects to consider between the business and the service provider include, among other things, how the worker is paid (including the terms agreed upon for payments), reimbursement of expenses in connection with completing a job, and the party providing tools and/or supplies to perform the service
- NATURE OF RELATIONSHIP: The nature of the relationship between business owner and worker provide important evidence that can assist in making the proper determination between employee and independent contractor. The attributes to identify regarding the nature of the relationship include the presence of written contracts between the parties, the possibility of the worker to receive (or being eligible to receive) employee benefits
Conclusion. Determining the status of workers as employees or independent contractors is an imperative classification that will affect the manner in which your business compensates these service providers. Unfortunately, objective criteria is not available to assist business owners in making such an important decision. Business owners must evaluate the relationship between parties independently, taking into consideration the unique attributes identified above, in arriving at the proper classification of their workers. Ultimately, the employee/employer classification involves business owners having more control over the manner in which workers perform their jobs with the service provider having less independence in carrying out their responsibilities immediately or in the future (i.e., health insurance, vacation pay, sick pay, and retirement plan compensation), the duration and continuity of the relationship, and the overall importance of the work performed to the business.
–Employee or Independent Contractor?: The Worker Classification Dilemma by Susan C. Allen