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.

The MN Department of Labor oversees the state’s programs for apprenticeship, construction codes and licensing, dual training, occupational safety and health, wage and hour standards, and worker’ compensation. Check out their website at www.dli.mn.gov for a complete listing of licensing requirements.

Legislation passed in 2012 requires individuals who wish to work as independent contractors in the construction industry in MN to register with the MN Department of Labor and Industry (DLI). Any worker doing commercial or residential building construction is classified as an independent contractor if they meet the following conditions:

  1. Maintain a separate business with the independent contractor’s own office, equipment, materials and other facilities.
  2. Holds or has applied for a federal employer identification number or has filed business or self-employment income tax returns with the federal Internal Revenue Service based on that work or service in the previous year.
  3. Operates under contracts to perform specific services or work for specific amounts of money under which the independent contractor controls the means or performing the services or work.
  4. Incurs the main expenses related to the service or work that the independent contractor performs under contract.
  5. Is responsible for the satisfactory completion of the work or services that the independent contractor contracts to perform and is liable for a failure to complete the work or service.
  6. Receives compensation for work or service performed under a contact on a commission or per job or competitive bid basis and not on any other basis.
  7. May realize a profit or suffer a loss under contracts to perform work or service
  8. Has continuing or recurring business liabilities or obligations
  9. The success or failure of the independent contractor’s business depends on the relationship of business receipts to expenditures.

For additional information about independent contractors, contact:

MN Unemployment Insurance Program
651.296.6141
www.uimn.org