Employee or Independent Contractor?

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Business must properly classify their people.

With many states passing new laws requiring employers to provide employees with sexual harassment policies and training, classifying your people not only reduces possible tax issues but potential harassment lawsuits. And some states, such as California, have defined independent contractors for the employee count properly

An employee is generally considered anyone who performs services when the business controls what will be done and how it will be done. Therefore, if you're an employee, the employer has the right to control the details of how the employee's services are performed.

Independent contractors are normally people in a separate trade or business or profession in which they offer their services to the public.

Whether a person is an independent contractor or an employee depends on the relationship between the person and the business.

Generally, there are three categories to answer.

Behavioral control:

Does the company control or have the right to control what the person does and how the person does the job?

 If so, the person is an employee.

Financial control:

Does the business direct or control the financial and business aspects of the person's job?

 If so, that person is an employee.

 Is the business aspects of the person's job controlled by the payer?

 If so, that person is an employee.

 Is the individual paid based upon an agreed salary, hourly basis, expenses are reimbursed, the business provides tools/supplies, etc.?

 If so, that person is an employee.

 Does the person provide invoices for work performed, has their own tools/supplies?

 If so, the person is NOT an employee.

 Relationship of the parties:

 Are there written contracts where employee-type benefits such as a pension plan, insurance, vacation pay provided by the business?

 If so, that person is an employee.

 Does the business continue the relationship with the person, and is the work performed a key aspect of the business?

 If so, the person is an employee.

So Who is an Independent Contractor?

Generally, a person is an independent contractor if ANY of the following apply to them.

1.     They carry on a trade or business as a sole proprietor or an independent contractor, or

2.     They are a member of a partnership that carries on a trade or business, or

3.     They are otherwise in business for themselves, including a part-time business.

Independent contractors, including those who earn money from gig economy work, are generally required to file a tax return and make estimated quarterly tax payments.

They also generally must pay self-employment tax which is Social Security and Medicare tax, as well as income tax. These people qualify for the home office deduction if they use part of a home for business.

For a further in-depth discussion of this matter, please consult with your CPA. The information provided is for educational purposes only and is not legal advice. For legal questions please consult with your legal advisor.