| Whether
a worker is an employee or independent
contractor can have important tax
ramifications. If the worker
is an employee then the employer must
withhold and pay employment
taxes. The employee may also be
eligible to participate in benefit
plans including insurance coverage and
retirement plans.
The federal government has
several criteria for who should be
treated as an employee. Three
factors are considered when
determining if an individual is an
employee or an independent
contractor. These factors are
behavioral control, financial control
and type of relationship of the
parties.
Behavioral control:
The facts must show whether the
business has a right to direct and
control how the worker does the task
for which he/she was hired including:
- When and where to do the work.
- What tools and equipment to use.
- What workers to hire or to
assist with the work.
- Where to purchase supplies and
services.
- What work must be performed by a
specified individual.
- What order or sequence to
follow.
Training provided by a business to
an individual is a strong indicator
that an employee relationship exists.
(Look to who has retained the right to
control the details of a worker’s
performance).
Financial control:
The extent to which the worker has
unreimbursed business expenses.
Subcontractors are more likely to have
such expenses in the performance of
their jobs. The extent of the
worker’s investment. The
extent to which the worker makes his
services available to the
public. How the business pays
the worker. Subcontractors are
usually paid a flat fee for a
job. There are exceptions to this
rule for professional services.
The extent to which the worker can
realize a profit or a loss.
Type of relationship:
- Will the written contract be
carefully reviewed?
- Are there employee type
benefits?
- Is there permanency to the
relationship?
To what extent are services
performed by the worker a key aspect
of the regular business of the company
(i.e. laborers working for a
contractor, lawyers working for a law
firm)?
Connecticut Variation:
Under Connecticut labor
law. The test of
employee/independent contractor for
unemployment tax purposes is
different. Under Connecticut law,
if the following three items are true
then the worker is considered to be an
independent contractor.
The individual must be free from
direction and control in connection
with the performance of the service
both under the contract and in fact.
The individuals service must be
performed either outside the usual
course of business or outside the
employers places of business.
The individual must be customarily
engaged in an independently
established trade, occupations
profession, or business of the same
nature as the service performed.
|
