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June 25 , 2006 -- I am a local contractor here in Fort Collins. How do I know if the people assisting me should be classifed as employees or independent contractors?

It is important that a business classify its workers correctly. A business must withhold federal income tax, social security taxes, and federal unemployment taxes on wages it pays workers who are employees and provide them with the same fringe benefits and retirement plan coverage available to its other employees. By contrast, these responsibilities don't apply for workers who are independent contractors.

Under the "common law" rules developed by the courts, a worker generally is an employee for federal tax purposes if the employer has the right to control and direct the worker regarding the job he is to do and how he is to do it. IRS usually applies the following factors to see if the employer has the right to direct and control the worker:

  • A worker who must comply with instructions about when, where, and how he or she is to work is ordinarily an employee. This control factor is present if the business has the right to make the worker follow instructions.
  • Training a worker by teaming an experienced employee with the worker or by requiring him or her to attend meetings, indicates the business wants the services performed in a particular method or manner. Ongoing training is a particularly strong sign of an employer-employee relationship, but orientation or information programs about company policies aren't.
  • A business that hires, supervises, and pays assistants for a worker is exhibiting employer-like control over the worker on the job.
  • A continuing relationship between the worker and the business indicates an employer-employee relationship exists. A continuing relationship may exist where the worker is called in at frequently recurring, although irregular, intervals.
  • The fact that a business requires work to be performed on its premises suggests control over the worker (if the work could be done elsewhere).
  • A business's requirement that the worker submit regular or written reports indicates a degree of control over the worker.
  • Payment by the hour, week, or month generally points to an employer-employee relationship. Payment by the job or on a straight commission basis generally indicates a worker is an independent contractor.
  • A business exhibits characteristics of an employer if it supplies a worker with significant tools, materials, and other equipment, or ordinarily pays the worker's business and/or traveling expenses.
  • A worker who performs more than minimal services for a number of unrelated businesses at the same time generally is an independent contractor.
  • The fact that a worker makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor relationship.
  • The right to fire a worker is a factor indicating that he or she is an employee. An independent contractor on the other hand, can't be fired as long as he or she produces the work that was contracted-for.

There is no litmus test for exactly how many of these factors must be satisfied, nor are these factors uniformly applied.

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