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EMPLOYEE vs INDEPENDENT CONTRACTOR

 

This subject matter is relevant based on calls we receive and IRS information on this subject matter.

 

QUESTION: My owner-operator business is growing, and I need to have another driver.  How do I pay him?  Most drivers want me to just write them a check without withholding taxes. 

 

ANSWER:  Wow! That’s a great question and a common one.  Determining if a person is an employee or an independent contractor has important tax consequences for the employee.  Worker classification affects how you pay your Federal income tax, social security and Medicare taxes, and how you file your income tax return. 

As an employer, the worker classification affects your bottom line and will determine whether you have to file payroll tax returns (and incur additional costs) and include the worker in any fringe benefit plans you may offer.

 

 

QUESTION:  Okay.  I don’t want to get involved with payroll taxes or payroll.  What do I do?

 

ANSWER:  You will need to hire a person who is an independent contractor.  Hiring someone and saying they are independent can have dire affects on you.  Failure to classify the person properly can lead to penalties and interest and possibly IRS audits if they are really employees for failure to withhold and deposit payroll taxes.

 

 

QUESTION:  How will the IRS find out if I classify them incorrectly?

 

ANSWER:     If you did not withhold payroll taxes from your worker and they get audited by the IRS for filing an improper income tax return or not filing at all, it could raise a red flag.  It also could lead to you if you fire your worker or they quit and they file for unemployment benefits.  Since you did not pay payroll taxes, there are no monies in your unemployment account for the state to pay to your former worker.  Claims are filed and you are in trouble with the IRS and your State.

 

 

QUESTION:  How can I be sure to hire an independent contractor?

 

ANSWER:  Control is the key.  If you have control over what work is being done and how it will be done, you are considered an employer and your hire is your employee and, therefore, you need to withhold payroll taxes.

QUESTION:  What is considered “having control”? How do I decide if a worker is independent or an employee?

 

ANSWER:  A worker’s status is determined by a common law test.  This result is determined by applying relevant facts that fall into three main categories; behavioral control, financial control, and the type of relationship itself.  In each case, it is very important to consider all the facts – no single fact provides the answer.

 

 

QUESTION: Can you explain?

 

ANSWER: BEHAVIORAL CONTROL: These facts show whether there is a right to direct or control how the worker does the work.  A worker is an employee when the business has the right to direct and control the worker.  The business does not have to actually direct or control the way the work is done as long as the employer has the right to direct and control the work.

• Instructions: if you give extensive instructions on how work is to be done, this suggests that you may be an employer.  Instructions can cover a wide range of topics, for example, how, when, or where to do the work, or what truck to use.  If the worker is using one of your trucks, chances are they are an employee.
• Training:  if you provide the worker with training about required procedures and methods, this suggests that the business wants the work done in a certain way and you may be an employer.

FINANCIAL CONTROL:  These facts show whether there is a right to direct or control the business part of the work.

• Significant Investment:  If the worker owns his own truck, they may be an independent contractor.  However, that may not be necessary to be an independent contractor.  They can lease a truck.
• Expenses: if you do not reimburse for some or all business expenses, they your worker may be an independent contractor, especially if the unreimbursed business expenses are high.
• Opportunity for Profit or Loss: if they can realize a profit or incur a loss, this suggests that they are in business for themselves and that they may be an independent contractor.

RELATIONSHIP OF THE PARTIES: These are facts that illustrate how the business and the worker perceive their relationship.

• Employee Benefits: if your worker receives benefits, this is an indication that he is an employee. 
• Written Contracts:  a written contract may show what both you and the business intend. 

 

This article has been presented by PBS Tax & Bookkeeping Service, a company which has been providing income tax and bookkeeping services to the trucking industry for over a quarter century.  If you would like further information, please contact us at 800-697-5153.  Visit our Web Site at www.pbstax.com.

 

“Everyone’s financial situation is different.  This article does not give and is not intended to give specific accounting and/or tax advice.  Please consult with your own tax or accounting professional.”