​Employee vs. contractor: Which does your business employ?

If you run a business, you might employ employees or contractors. There are some important legal distinctions between the two groups, and the U.S. Department of Labor recently announced some changes. So, it’s important that you figure out the type of worker you employ.

Employee vs. independent contractor
According to the IRS, there are three categories for you to consider when determining what type of worker you employ:

• Behavioral control: Does your company control — or have the right to control — what the worker does and how they do that job? Does the person have a sales tax license and provide services to other business owners? Do they set their own hours?
• Financial control: Does your business direct or control the financial and business aspects of your worker’s job? That would include things like how the worker is paid, if and when expenses are reimbursed, who provides tools and supplies, etc. Does the person turn in a timecard or something similar, or do they submit an invoice?
• Relationship of the parties: Are there written contracts or employee-type benefits like a pension plan, insurance, vacation pay? Will the relationship continue, and is the work performed a key aspect of your business?

Control the key difference
The big difference is if your business can — or has the right to — control what and how your worker performs a service, then you have an employee.

If you’re employing an independent contractor, you’ve hired someone likely in an independent trade, business, or profession. They also probably offer their services to other businesses or the general public, and you need to send them a Form 1099.

Misclassified worker
This is a big one: If you misclassify workers as independent contractors, the IRS can hold you liable for employment taxes for that worker.

Voluntary Classification Settlement Program
For businesses that qualify, there’s the Voluntary Classification Settlement Program. It’s an optional program that can allow your business to reclassify your workers as employees for future employment tax purposes.

You have to meet certain eligibility requirements, fill out Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS. But if you qualify, you can get partial relief from federal employment taxes.

If you have questions about whether your workers are employees or contractors, reach out to us.