May 19, 2005
The creation of an employer-employee relationship imposes many obligations on the employer—verifying authorization to work on the I-9 form, providing workers' compensation insurance, paying payroll taxes, and on and on. Many businesses try to avoid those obligations by classifying some workers as independent contractors, or 1099 workers. Too frequently, such classifications are made without sufficient attention to the applicable legal standards, leading to possible liability for unpaid taxes, overtime and other obligations. The government agencies with an interest in the obligations that flow from the employer-employee relationship are always looking for violators from whom they can extract money owed and penalties.
The label that the user of services and the provider of services place on their relationship does not determine whether a person should go on the payroll or not. The key factor is the amount of control that the recipient of the services exercises over the manner and means by which the provider performs the services. Here are two examples to illustrate the difference between an independent contractor and an employee.
1. If you hire a woodworker to build cabinets in your home, you would give her a general idea of what you are looking for, and she would give you a plan and an estimate for the work. After your approval, the woodworker would proceed to purchase materials, select appropriate tools and put in the necessary hours to get the job done, drawing upon her training and experience to determine how to build the cabinets. You would not be concerned with how she gets the job done, but with what the finished product looks like. The woodworker is an independent contractor.
2. If you hire a college student during the summer to take care of general office tasks like copying, answering the telephone, and making deliveries, you would tell him how you want those tasks done. You would tell the student what hours to work. You would provide any tools or materials necessary for the student to do the tasks. You would completely control the manner and means by which the student does his job. The college student is an employee.
To help you find the sometimes fine line that separates an independent contractor from an employee, take advantage of IRS Form SS-8, a questionnaire that elicits information about the relevant factors. Although the form is designed for requesting a formal ruling, you do not have to send it to the IRS. Just use it to make your own analysis. It is available at:
http://www.irs.gov/pub/irs-pdf/fss8.pdf
You will find an explanation of the standards that the IRS uses to make the determination at:
http://www.irs.gov/publications/p15a/ar02.html
If you wrongly classify someone who works for you as an independent contractor, you will be in violation of the immigration laws for failure to verify authorization to work, you will be in debt to the IRS and your state tax agency for unpaid payroll taxes and failure to withhold, and you will have to pay all the medical bills and disability payments if the worker suffers a work-related injury. Do not get it wrong. Know who is an employee.