Independent Contractor or Employee

Small and medium sized businesses have been put on notice by the state governments.  Most States have budget shortfalls and need to obtain additional tax revenue.  States are hiring new investigators in order to assess more small and medium sized company’s classification of independent contractors. 

Why should a small and medium sized company be concerned?

The Employer is responsible for the employment tax liability and any interest or penalties attributable to the liability for employment taxes.  Put simply the cost could be substantial if you have employees classified as independent contractors that should be employees.  See Internal Revenue Code section 3509 for more information regarding consequences and seek a qualified attorney for assistance.

What determines the classification?

There are two main characteristics that determine the difference between an independent contractor and an employee?

  1. Control
  2. Independence

The degree of control and independence determines if the individual should be classified as an employee or as an independent contractor.  The more control the company has on the worker and less independence the worker has the higher the probability that the worker is an employee.  To determine the degree of control and independence, evaluate the behavior, financial, and structural relationships.


  1. Does the company control what the worker does?
  2. Does the worker set their own hours?
  3. Is the work completed based on the worker’s own knowledge and experience?
  4. Does the worker have many clients?


  1. Are all the worker’s expenses reimbursed by the business being serviced? 
  2. Does the worker have benefits offered by the business being serviced?
  3. Is the worker paid a salary or bonus for the work preformed?
  4. Does the business being serviced supply the use of equipment and supplies to complete the work?


  1. Are there written contracts?
  2. Is the relationship permanent?

The answers to these questions should give you an understanding whether the worker is an employee or a sub-contractor.  If you are unsure, please contact your attorney.

For additional information, see the following link to the IRS website related to “Independent Contractor or Employee”,,id=99921,00.html

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