I do not believe that this column should address the same topic very often, but I decided to make an exception this month. Many companies have experienced problems because they were unable to distinguish between employees and independent contractors. Broadly speaking, companies are responsible for their employees, but not for their contractors. But simply calling someone a contractor or an employee is not conclusive of that persons status, and the Internal Revenue Service is prepared to help you decide that persons status.
The consequences of failing to classify someone working for you as an employee or a contractor can be serious. The tax implications are obvious; you have to withhold income and social security taxes from an employees check, but you do not have to withhold from payments to a contractor. If the person you believe is a contractor fails to make required payments to state and federal governments, the tax collectors may come after you if they decide you should have treated the person as an employee and made appropriate withholdings.
Other important considerations are that companies are legally responsible for the negligent actions of their employees, subjecting the companies to liability for personal and property harm caused by that negligence. However, there is generally no such liability for the negligence of contractors. Finally, workers compensation coverage extends to employees, but not to contractors. Although companies often view workers compensation as a cash register for their employees to fake injuries, the benefits exclusivity of workers compensation prevents employees from suing for more extensive tort damages. There is no such limitation against lawsuits by contractors for personal injuries suffered while performing work for companies.
These considerations, along with others not mentioned here, require companies to consider carefully the status of persons performing work for them. The IRS has prepared and distributed a form that allows companies to describe the work performed by an employee/contractor and obtain advice from the IRS as to the proper status of the person. Designated Form SS-8, copies are available on request from the IRS. This form contains a detailed list of the factors that the courts, administrative agencies, and tax collectors have compiled in making determinations on the status of individuals as employees or contractors.
The factors listed in the form include the following:
There is no conclusive list of factors that will control the decision. As we lawyers say, the question is decided on a "case-by-case" basis, which is a fancy way of saying that each situation is different. Its very difficult to draw generalizations, but heres a short-hand test I always apply: using the example of someone youve hired to paint your house, do you tell the person to paint the house white and to finish by the end of the week (that persons a contractor), or do you tell the person to paint the house white using paint and brushes you supply, set the specific hours during which the painting can be done, tell him to use only up-and-down brush strokes, not side-to-side, etc. (that persons an employee). The more control you exert over how the person performs the job, the more likely that person is an employee, not a contractor.
Of course, its useful to have the person agree that he has the status of employee or contractor, depending on your needs. If you want the person to be a contractor, prepare and sign a written contract with the person, in which the person acknowledges that he is a contractor. On the other hand, if you want the person to be an employee, put him on your normal payroll and set up the customary withholding deductions. Having the person fill out a W-2 is always strong evidence of an employment relationship.
Mark P. Johnson is a partner in the law firm of Sonnenschein, Nath and Rosenthal of Kansas City, MO. He specializes in labor law.
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