Summit Blog
Monday, July 26, 2010
Employees vs. Independent Contractors
Employees verses Independent Contractors
The determination of if a worker is an employee or independent contractor is important!
Workers are employees if they meet the following criteria:
• Required to comply with employer’s instructions about when, where, and how to work
• Works exclusively for the employer
• Hired by the employer
• Subject to dismissal; can quit without liability
• Has a continuing relationship with the employer
• Work done personally
• Performs services under the company’s name
• Paid a salary; reimbursed for expenses; participates in company’s fringe benefits programs
• Furnished tools, equipment, materials, and training
• If an outside salesperson: company provides leads, sets terms and conditions of the sale, assigns a territory, and controls the sales process
These workers will have Federal Income Tax, State Income tax (where applicable), Social Security, Medicare and other mandatory taxes deducted from their paycheck. In addition to the employee’s taxes the employer will also have to pay taxes in the form of: Federal Unemployment Tax, Social Security, Medicare and State Taxes.
Independent Contractors are workers that:
• Sets own hours; determines own sequence of work
• Can work for multiple employers; services available to the public
• Is self-employed
• A contract governs how the relationship can be severed
• Works by the job
• Permitted to employ assistants
• Performs services under the worker’s business name
• Payment by the job; opportunity for profit and loss
• Furnishes own tools, equipment, and training; substantial investment by worker
• Controls the sales process and terms
These workers are not taxed upfront by the Federal or State government. Instead they pay the full share (both employee and employer share) of taxes when they file their personal income tax return.
This may seem like a great deal for employer looking to hire help at a discounted rate. However, if the IRS finds that an employer had a misclassified employee the company is liable. If the employer unintentionally misclassified a worker the penalty for federal income tax is 1.5% of wages paid and 3% if the employer did not file correct 1099 documentation. Also, the employer is responsible for 20% of the employee’s portion of the Social Security and Medicare tax and 40% if the correct 1099 documentations were not filed. If the employer intentionally misclassifies a worker the employer is subject to 100% of the employee’s Federal Income Tax, Social Security and Medicare, plus penalties and interest.
So next time you think of hiring a new worker and are concerned about if they are an employee or an independent contractor, a call over to Summit Payroll and HR can help you out.
Steve Kessler CPP, Payroll Support, Summit Payroll and HR