Independent Contractor or Employee
Are your workers independent contractors or employees?
The answer can have a profound impact on your record keeping requirements as a small business owner. Knowing whether your workers are or are not employees will affect the amount of taxes you must withhold from their pay. It will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give them.
Employers who mis-classify workers as independent contractors can end up with substantial tax bills as well as penalties for failing to pay employment taxes and failing to file required tax forms.
Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.
Generally, whether a worker is an employee or an independent contractor depends upon how much control you have as a business owner. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees. If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.
Three broad characteristics are used by the IRS to determine the relationship between businesses and workers:
- Behavior Control — Covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means.
- Financial Control — Covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
- Type of Relationship — Relates to how the workers and the business owner perceive their relationship.
Knowing the proper worker classification can be critical to your business. Don’t guess.
Note: If you already have a Independent Contractor Exemption Certificate (ICEC); you do not need to register until your ICEC expires.
If you are a business owner who hires casual labor or independent contractors you can check your worker’s status online:
For more information and/or to register, go online to Minnesota Department of Labor and Industry at http://www.dli.mn.gov/CCLD/register.asp