Employee or Independent Contractor
Posted on Wednesday, May 23, 2012
Payments made to employees and independent contractors are treated differently. Organizations must withhold income taxes, withhold and pay Social Security taxes and Medicare taxes and pay unemployment taxes on wages paid to employees for services. In order to determine how to treat payments for services, first the organization must decide if it has employees or independent contractors.
There are three issues that must be considered in determining if the individual is an employee or an independent contractor.
1. Behavioral Control
• Does the organization have the right to control how the individual does the work?
• Are there specific instructions given on -
How, when, or where to do the work?
What tools and equipment to use?
What assistants to hire to help with the work?
Where to purchase supplies and services?
What work must be performed by a specified individual?
What sequence to follow?
• Does the organization provide training on the required procedures to perform the work?
If the answer to these questions is yes, then most likely an employee relationship exists because the organization controls the individual.
2. Financial Control
• Does the organization control the business aspects of the individual’s job?
Independent contractors have more independence (hence independent contractors) than employees. These individuals tend to seek out more than one business opportunity at a time and usually determine what types of tools used in providing their services. They are also more likely to have unreimbursed expenses than employees. Independent contractors are also often paid a flat fee per month or per project rather than a regular guaranteed hourly wage amount as an employee is.
• What type of relationship exists between the organization and the individual?
• Does the individual receive benefits (retirement, insurance, etc.) from the organization?
• Is the expectation that the relationship will continue indefinitely or only for a specified project or period?
• Is there a written contract between the organization and the individual?
If the individual is treated similar to the employees of the organization then the individual is probably also an employee.
It is very important for an organization to classify workers correctly as an organization can be held liable for employment taxes, plus interest and penalties, if a worker is incorrectly classified as an independent contractor.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
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