Payroll Laws

Independent Contractor Rules

Just because somebody says they are a contractor doesn't mean the IRS won't tell you that you have to reclassify the worker as an employee. We examine the heated issue of employees versus contractors from a payroll tax perspective.

When reporting a worker as an independent contractor, be certain the worker qualifies.

Independent Contractor Rules

Otherwise you could be held responsible for back employment taxes, workers' compensation insurance, unemployment insurance the worker's unpaid income taxes, plus interest and penalties.

You might also owe the value of health insurance or other benefits not given to the contractor, pension plan contributions and even stock options.

How do you know if somebody you engage is an independent contractor?

Let's say you engage your friend Jim to help you with some accounting projects in the office. You write up a short contract and Jim starts the work. Is Jim an employee or is he a contractor? Take a short moment to think through your answer.

You might think that he is a contractor because you haven't hired him as an employee and you engaged him with a contract. Unfortunately, it's not that simple. It all depends on the circumstances.

The general rule is that an individual is an independent contractor if you control or direct the results of the work but you don't control the means and methods of accomplishing the end results.

We've gathered up some of the common differences between employees and independent contractors. You can use the table below to help determine if you are classifying employees and classifying contractors correctly.

Independent Contractor
Performs services under the employer's company name
Performs services under the worker's name or the worker's company name
Hired exclusively by the employer
Works for many employers and actively offers services to others
Does the work
May engage assistants or subcontractors
Employer defines when, where, and how long to work
Contractor sets his or her own hours and decides how to structure the work and what tools to use
Has a long-term and ongoing relationship
Shorter projects. Scope of work defines duration
Can quit at any time and can be terminated by the employer at any time
Typically works under a contract that defines what happens in a termination scenario
Receives a salary and is reimbursed for expenses
Payment by the project. Covers own expenses and may record a profit or loss for any given project.
Tools, equipment, materials and training provided by employer
Contractor uses his or her own tools and equipment.
Works at the employer's premises
Works onsite or offsite, depending on the project
Wages and earnings reported on form W-2
Wages and earnings reported on form 1099


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