Do you have an Emplyee or an Independent Contractor?

Withholding of Income Tax on Wages.  Withholding of income tax by and employer is required on each of an employee’s wage payments.  Generally, the term “wages” includes all remuneration (other than fees paid to a public official) for services performed by an employee for an employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash.  Salaries, fees, bonuses, commissions on sales or on insurance premiums, taxable fringe benefits, pensions, and retirement pay (unless taxed as an annuity) are, if paid as compensation for services, subject to withholding.

The term “employer” includes not only individuals and organizations engaged in trade or business, but also organizations exempt from income, Social Security, and unemployment taxes.  Withholding also applies to wages and salaries of employees, corporate officers, and elected officials of federal, state, and local government units.

The term “employee” must be distinguished from and “independent contractor” for purposes of employment tax obligations.  An employer does not generally have to withhold taxes on payments to independent contractors.  In addition to the common law definition that focuses on the control that is exercised over what work is done and how it is done, the IRS has identified a 20 – factor test to assist in making this determination.  The factors are:

1.     Employee compliance with instructions required,

2.    Training,

3.       Integration of worker’s services into the business,

4.       Services are rendered personally,

5.       Ability to hire, supervise and pay assistants,

6.       A continuing relationship,

7.       Set hours of work are established,

8.       Full time is required,

9.       Work performed on business’s premises,

10.   Services performed in a set order or sequence,

11.   Oral or written reports required,

12.   Payment by hour, week or month,

13.   Payment of business and/or travel expenses,

14.   Tools and materials furnished,

15.   Worker invest in facilities,

16.   Worker can realize a profit or loss,

17.   Worker performs services for more than one business at a time,

18.   Worker makes services available to the general public,

19.   Business has the right to discharge worker, and

20.   Worker has the right to terminate the relationship.

Either an employer or employee, with or without the other’s knowledge or assent, may request that the IRS to make a determination as to whether or not a particular worker is an employee.  The request is made using Form SS-8.