Making the Employee vs. Independent Contractor Determination for Tax Purposes

February 17, 2009

Periodically, the Eaton Peabody Tax Group provides tips to its clients on common tax issues. One issue that businesses routinely face is determining whether a worker is an employee or independent contractor. Proper worker classification is a crucial step in complying with tax laws. Significant tax obligations, such as various withholding requirements, arise from an employee classification. A business's tax responsibility to an independent contractor, by contrast, ends with sending a Form 1099.
 
Generally, a worker is an employee if the employer has the right to control the manner and method by which an assigned task is to be done. The more input a business has regarding exactly how a job is to be undertaken, rather than merely dictating the desired outcome, the more likely the worker will be considered an employee. If the worker can generally work on his or her own terms so long as the business's goal is achieved, he or she is probably an independent contractor.
 
The IRS has specified a number of factors that guide its judgment as to whether a given worker is an employee or an independent contractor for tax purposes. These are not, however, strict rules; the presence or absence of any given factor does not independently dictate the worker's status. 
 
Under these IRS guidelines, a worker is likely an employee if he or she:

• Must comply with instructions about when, where, and how he or she is to work 
• Receives ongoing training, especially if teamed with an experienced employee 
• Has an assistant that is hired, supervised, and compensated by the business 
• Has a continuing relationship with the business Is required to perform services on the business's own
premises, if such work could be done elsewhere 
• Is paid by the hour, week, or month, unless that arrangement is meant to be a convenient way to pay an
agreed-upon lump sum 
• Receives tools, materials, or other equipment from the business 
• Is reimbursed for travel or other business expenses 
 

Conversely, a worker is likely an independent contractor if he or she:

• Has to hire, supervise, and pay for his or her own assistant 
• Is paid by the job or on commission 
• Must pay for facilities (office space, etc.) that an employee normally would not be required to maintain 
• Performs substantial services concurrently for a number of unrelated businesses 
• Makes his or her services available to the general public on a regular and consistent basis 
 
The Eaton Peabody Tax Group has experience in worker classification issues and would be happy to assist you with
any questions you may have. 

If you would like more information on the content of this alert, please contact Christine Burke Worthen, a
shareholder and Chair of Eaton Peabody's Tax Practice Group, or Rodney A. Lake.

This alert is provided as general information, and is not a substitute for legal or other professional advice.