Magazine article Supervisory Management

Employee or Contractor? the IRS Wants You to Know the Difference

Magazine article Supervisory Management

Employee or Contractor? the IRS Wants You to Know the Difference

Article excerpt

The distinction between an employee and an independent contractor has become a source of controversy and embarrassment to managers in recent years.

To protect yourself, it's important to thoroughly analyze the relationships you have with people who work for you on a for-hire basis. In many cases, in the eyes of the IRS, these people are actually your employees. This means that you'll be obliged to withhold federal income tax from their paychecks, and withhold and pay social security and Medicare taxes--or incur a 100 percent penalty on the taxes owed!

What is the difference between an employee and an independent contractor? Very generally, if you, as an employer, tell an individual what you want done, how you want it done, and the results you expect, that individual is an employee. If you only concern yourself with the results of the work, then you're likely dealing with an independent contractor.

But, as is usually the case when you deal with the IRS, there are a lot of variables. Suppose you've just hired Mr. X, a self-employed designer, to design a more efficient, user-friendly office space. If you answer "yes" to any of the questions below, Mr. X may be your employee for tax purposes:

1. Must he comply with your instructions on when, where and how to work?

2. Have you trained him to perform the work?

3. Have you integrated his services into the overall operation of the business?

4. Do you require that he do the work himself, as opposed to sub-contracting it?

5. Are you responsible for the firing and payment of any assistants? …

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