Independent Contractor Or Employee? Worker Classification Matters.

If you own a business, it is your legal obligation to properly classify your workers as either employees or independent contractors. It is important that the classification be done correctly to avoid problems with the IRS. The main purpose for classifying a worker is to determine the taxes and record-keeping for which your business will be responsible. If you fail to accurately report an employee, you may be held liable for past-due employment taxes. There are relief provisions in some circumstances.

The following information is intended to assist you in making the correct classification. If you need further information, give us a call at 651-319-5180.

Worker classifications — The IRS has four worker classifications:

1. Independent contractor — An independent contractor controls the kind of work he/she takes on and how the work is completed. The business hires the independent contractor to complete the work and controls only the result or product. While the business may set deadlines for an independent contractor, it may not set specific work hours.

2. Employee — If a business controls what, where, when and how work is done, the individual doing the work is usually considered an employee.

3. Statutory employee — Some workers who meet the elements to be an independent contractor may still be considered an employee due to specific statutes designating them as such. Statutory employees include:

  • Individuals who work from home under specific instruction with materials the business provides and those materials are returned to the business or someone named by the business

  • Certain food and beverage delivery drivers
  • Commissioned dry cleaning and laundry drivers
  • Insurance agents working primarily for one life insurance company selling life insurance or annuity contracts
  • Full-time traveling salespeople who submit orders directly to the business from other businesses or wholesale establishments.

4. Statutory nonemployee — Statutes deem some workers who would otherwise be considered employees nonemployees. These include direct sellers and real estate workers who are not paid on an hourly basis and companion sitters (home health aides and private nurses) not employed by a placement service.

Still Not Sure How To Classify A Worker?

In some cases, it may be difficult to classify a particular worker. To get an answer upfront, you may wish to complete and submit form SS-8 to the IRS, allowing the IRS to make a determination of the worker's status. Form SS-8 and its detailed instructions can be downloaded online from www.irs.gov. Consult with your attorney before filing the form. You may direct any questions to Paul Overson of Coodin & Overson, PLLP.