Hiring someone on an independent contractor basis can have many advantages for employers. For example, independent contractors can:
- Be hired on a per-project basis and let go when the project is completed.
- Be more experienced workers who want to maintain a degree of independence. In other words, they don’t require the supervision that is necessary with employees.
And you don’t have to pay fringe benefits or workers’ compensation for independent contractors.
Or do you? Although most companies are aware of the problems of misclassifying employees as independent contractors, potentially expensive situations still arise. Misclassifying someone can lead to back taxes, penalties and fines. So it pays to know the difference.
Generally, the degree of control you exercise over the worker determines whether he or she is an employee or independent contractor. For example, an employer would probably provide a workers’ materials and tools, while independent contractors usually provide their own. An employer sets an employee’s work hours while an independent contractor usually has the right to set his or her own schedule. In addition, the more “integrated” or central a job is to a company’s operations, the more likely the worker is to be considered an employee.
The chart below can help you determine whether a worker is an employee or an independent contractor. Unfortunately, no single factor determines a worker’s status. The IRS and other government agencies, as well as courts that hear related cases, examine a variety of factors.
To protect your organization, you can request documents from an independent contractor that will help you prove his or her status in the event the IRS or other government agencies ask for it. These include copies of advertising or directory listings, business name statements, an Employer Identification Number (if he or she has employees) and business licenses or professional licenses.
If you’re still unsure whether a worker qualifies as an independent contractor, your tax professional can help you make this determination.