Distinguishing between independent contractors and employees is important for both tax and financial reasons. In order to comply with federal tax laws, you’ve got to be crystal clear about your workers’ status, and keep accurate records no matter what. Here’s how to distinguish between independent contractors and employees – and why it’s important.
Independent Contractor or Employee: The Litmus Test
The federal government provides pages of advice to help companies determine the status of those they employ. It’s less a matter of hard-and-fast rules and more a series of guidelines.
Generally speaking, independent contractors:
sure your company is doing it Demonstrate autonomy in their work. While you may give them specific tasks to do, how they do them and where and when are not under your control.
- Work for others while they work for you.
- Provide their own tools and workspaces, such as computers, desks, and phones.
- Advertise as a business and keep a separate business checking account.
A good example of an independent contractor is a freelance graphic designer hired to make your business logo. The designer doesn’t report to your office during set business hours. She has her own computer, software and telephone to complete the task. You’ve agreed on a deadline and payment terms for the project and provided her with details on how you would like the logo to look, but you don’t supervise her work or require her to accomplish the task in a specific way. She’s truly an independent contractor.
Don’t Blur the Lines
Occasionally, companies blur the lines between independent contractor and employee by overstepping the bounds of the contractor agreement. Some require independent contractors to be on-site for specific hours or to work at a specific desk or location provided by the firm. This may cross the line into employee territory.
Why the important distinction? The federal government requires that employers collect and report wage, salary and tax information for employees. There are new federal health mandates regarding insurance coverage for employees too. If you actually have employees but are treating them as independent contractors for taxation purposes, you’re violating many laws and could get into serious legal and financial trouble with the federal and state authorities.
The Importance of Form W-9 for Independent Contractors
Always ask your independent contractors to submit a Form W-9 and be sure to issue 1099 MISC to any independent contractor you pay more than $600 per year. These forms make it clear to the government that your business views the individual as an independent contractor and has kept the distinction clear for taxation purposes.
If you’re not sure if you’ve put everyone in the proper categories, give us a call and we’ll help you sort it all out.
Phone: (610) 756-7472