|
Before you can determine how to treat
payments you make for services, you must
first know the business relationship that
exists between you and the person
performing the services. The person
performing the services may be -
- An independent contractor
- A common-law employee (Employee)
- A statutory employee
- A statutory nonemployee
In determining whether the person
providing service is an employee or an
independent contractor, all information
that provides evidence of the degree of
control and independence must be
considered.
It is critical that you, the employer,
correctly determine whether the
individuals providing services are
employees or independent contractors.
Generally, you must withhold income taxes,
withhold and pay Social Security and
Medicare taxes, and pay unemployment tax
on wages paid to an employee. You do not
generally have to withhold or pay any
taxes on payments to independent
contractors.
Caution: If you
incorrectly classify an employee as an
independent contractor, you can be held
liable for employment taxes for that
worker, plus a penalty.
Who is an Independent
Contractor?
A general rule is that you, the
payer, have the right to
control or direct only the result of the
work done by an independent
contractor, and not the means
and methods of accomplishing the result.
Example: Vera
Elm, an electrician, submitted a job
estimate to a housing complex for
electrical work at $16 per hour for 400
hours. She is to receive $1,280
every 2 weeks for the next 10
weeks. This is not considered
payment by the hour. Even if she
works more or less than 400 hours to
complete the work, Vera Elm will receive
$6,400. She also performs
additional electrical installations
under contracts with other companies,
that she obtained through
advertisements. Vera is an independent
contractor.
Who is a Common-Law Employees
(Employee)?
Under common-law rules, anyone
who performs services for you is your
employee if you can control what will be
done and how it will be done. This is so
even when you give the employee freedom of
action. What matters is that you have the
right to control the details of how the
services are performed.
To determine whether an individual is
an employee or independent contractor
under the common law, the relationship of
the worker and the business must be
examined. All evidence of control and
independence must be considered. In an
employee-independent contractor
determination, all information that
provides evidence of the degree of control
and degree of independence must be
considered.
Facts that provide evidence of the
degree of control and independence fall
into three categories: behavioral control,
financial control, and the type of
relationship of the parties. Refer to
Publication 15-A, Employer's Supplemental
Tax Guide for additional
information.
Who is an Employee?
A general rule is that anyone who
performs services for you is your employee
if you can control what will
be done and how it will be done.
Example: Donna Lee
is a salesperson employed on a full-time
basis by Bob Blue, an auto dealer. She
works 6 days a week, and is on duty in
Bob's showroom on certain assigned days
and times. She appraises trade-ins, but
her appraisals are subject to the sales
manager's approval. Lists of prospective
customers belong to the dealer. She has
to develop leads and report results to
the sales manager. Because of her
experience, she requires only minimal
assistance in closing and financing
sales and in other phases of her work.
She is paid a commission and is eligible
for prizes and bonuses offered by Bob.
Bob also pays the cost of health
insurance and group-term life insurance
for Donna. Donna is an employee of Bob
Blue.
Statutory Employees
If workers are independent
contractors under the common law rules,
such workers may nevertheless be treated
as employees by statute ( statutory
employees ) for certain employment tax
purposes if they fall within any one of
the following four categories and meet the
three conditions described under Social
security and Medicare taxes ,
below.
- A driver who distributes beverages
(other than milk) or meat, vegetable,
fruit, or bakery products; or who
picks up and delivers laundry or dry
cleaning, if the driver is your agent
or is paid on commission.
- A full-time life insurance sales
agent whose principal business
activity is selling life insurance or
annuity contracts, or both, primarily
for one life insurance company.
- An individual who works at home on
materials or goods that you supply and
that must be returned to you or to a
person you name, if you also furnish
specifications for the work to be
done.
- A full-time traveling or city
salesperson who works on your behalf
and turns in orders to you from
wholesalers, retailers, contractors,
or operators of hotels, restaurants,
or other similar establishments. The
goods sold must be merchandise for
resale or supplies for use in the
buyer s business operation. The work
performed for you must be the
salesperson s principal business
activity. Refer to the Salesperson
section located in Publication
15-A, Employer s Supplemental Tax
Guide for additional
information.
Statutory Nonemployees
There are two categories of
statutory nonemployees: direct
sellers and licensed
real estate agents. They are
treated as self-employed for all Federal
tax purposes, including income and
employment taxes, if:
- Substantially all payments for their
services as direct sellers or real
estate agents are directly related to
sales or other output, rather than to
the number of hours worked and
- Their services are performed under a
written contract providing that they
will not be treated as employees for
Federal tax purposes.
|
