Contract vs. Employee
Many people are confused and think that if a person works temporarily or part-time that they can be treated as an independent contractor. That is incorrect. I have summarized for your use some of the factors that the law and the courts give us as guidelines.
The FICA regulations help us to define "employee" by giving us criteria to look at in doubtful cases. The facts of each case must be considered but the following general guidelines are given in the Employment Tax Regulations to help us define an employee:
Generally such relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he had the right to do so. The right to discharge is also an important factor indicating that the person possessing that right is an employer. Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work, to the individual who performs the services. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the results, he is an independent contractor. An individual performing services as an independent contractor is not as to such services an employee under the usual common law rules. Professional individuals who offer their services to the public are independent contractors and not employees.
Some of the specific factors which have been taken into account by the courts and the I.R.S. over the years are listed below.
1. Control - Is the person required to comply with instructions about when, where and how he is to work?
2. Independently employed - Is the person carrying on an independent business? For this purpose you may consider
a. whether they advertised or generally offered their services,
b. whether or not they as individuals, or as a group, used a business name in dealing with plaintiff for the purpose of contracting their services,
c. whether they listed themselves in any business capacity in city or telephone directories,
d. whether they maintained their own offices,
e. whether they procured necessary licenses for the carrying on of the business, or any other evidence tending to show that they were carrying on an independent business as individuals or as a group.
3. Right of Discharge - Does the employer have the authority at any time to discharge the person? An independent contractor cannot be fired so long as he produces a result which meets his contract specifications.
a. An employee has the right to end his relationship with his employer at any time he wishes without incurring liability. An independent contractor usually agrees to complete a specific job; he is responsible for its satisfactory completion or legally obligated to make good for failure to complete the job.
4. Right to Delegate - If the services must be rendered personally, presumably the employer is interested in the methods as well as the results. He is interested in not only the result but also the worker. This would indicate an employee.
5. Hiring, Firing and Paying - Hiring, supervising and paying assistants by the employer generally shows control over the persons on the job. Sometimes one worker may hire, supervise, and pay the other workers. He may do so as a result of a contract which he agrees to provide materials and labor and under which he is responsible for only the attainment of a result. In this case he is an independent contractor. On the other hand, if he hires, supervises and pays workers at the direction of the employer, he may be an employee acting in the capacity of a foreman for or representative of the employer.
6. Training - Training a person by an experienced employee working with him, by correspondence, by regular attendance at meetings, and by other methods indicates that the employer wants the service performed in a particular method or manner. This is especially true if the training is given periodically or at frequent intervals. An independent contractor ordinarily uses his own methods and receives no training from the purchaser of his services. In fact, it is usually his methods which bring him to the attention of the purchaser.
7. Skill - Less skilled occupations are more apt to be those of "employees" as opposed to those of "independent contractors".
8. Duration and Method of Payment - Importance is placed on the length of time for which the person is employed and the method of payment used, that is, whether the payment is by time or by the job.
If the time of employment is short, the worker is less apt to subject himself to control as to details and the job is more likely to be considered his job than the job of the one employing him. This is especially true if payment is to be made by the job and not by the hour.
9. Hours of Work - The establishment of set hours of work by the employer is a factor indicating control. This condition bars the worker from being master of his own time, which is the right of the independent contractor. If the nature of the occupation makes fixed hours impractical, a requirement that the worker work at certain times is an element of control.
10. Independent Trade - Is the person engaged in a distinct independent trade or business? Three factors looked at here are:
(1) Whether full-time is required by the "employer";
(2) Whether the worker is working for more than one firm at the time; and
(3) Whether the worker is making service available to the general public.
11. Tools and Place of Work - Naturally, a factor to be considered is whether the workman supplies the instrumentalities, tools, and place of work, or whether the taxpayer is supplying these things. The rationale is that when a valuable instrumentality is supplied by the "employer", it is normally understood that the worker will follow the directions of the owner in its use and, thus, the relationship tends towards one of employer/employee. An independent contractor generally furnishes his own tools.
Doing the work on the employer's premise in itself is not control. However, it does imply that the employer has control, especially when the work is the kind that could be done elsewhere. A person working in the employer's place of business is physically within the employer's direction and supervision. The use of desk space and telephone and stenographic service provided by an employer places the worker within the employer's direction and supervision. Work done off the premise indicates some freedom from control. However, this fact by itself does not mean that the worker is not an employee.
12. Profit and Loss - Does the worker bear the responsibly of earning a profit or a loss? The Service takes the position that the opportunity for profit or loss can be established by the fact that the individual hires, directs, and pays assistants; by the fact that the individuals has an office, equipment, materials, or other work facilities; by the fact that the individual has continuing and recurring liabilities obligations, and success or failure depends on the relationship of receipts to expenditures; by the fact that the individual agrees to perform specific jobs for prices agreed upon in advance and pays expenses incurred in connection with the work; and by the fact that the individual's services and those of the assistants establish or affect the worker's business reputation and not the reputation of those who purchased the services.
13. Labels - It is generally agreed that the label placed on the relationship is irrelevant if it does not represent the true substance of the relationship.
14. Intent - Which type of relationship do the parties really intend to create?
15. Business, Sequence, and Reports - Two things which are considered in this area are:
(1) The order or sequence set for performing a job and
(2) The requirement of oral or written reports.
16. Type of Work - If you find that the person performed the same type of work that is generally performed by regular employees and that he/she generally works side by side with the regular employees, then it is more likely that the person is an employee.
17. Industry Custom - Whether this type of job is usually done by an employee or an independent contractor is a factor which is considered.
This article was written by Nancy K. Phillips, CFP®, CPA and/or her staff. It is intended to provide you with an informative summary of current business, financial and/or tax planning news. Do not apply this general information to your specific situation without additional details and/or professional assistance.
The FICA regulations help us to define "employee" by giving us criteria to look at in doubtful cases. The facts of each case must be considered but the following general guidelines are given in the Employment Tax Regulations to help us define an employee:
Generally such relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he had the right to do so. The right to discharge is also an important factor indicating that the person possessing that right is an employer. Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work, to the individual who performs the services. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the results, he is an independent contractor. An individual performing services as an independent contractor is not as to such services an employee under the usual common law rules. Professional individuals who offer their services to the public are independent contractors and not employees.
Some of the specific factors which have been taken into account by the courts and the I.R.S. over the years are listed below.
1. Control - Is the person required to comply with instructions about when, where and how he is to work?
2. Independently employed - Is the person carrying on an independent business? For this purpose you may consider
a. whether they advertised or generally offered their services,
b. whether or not they as individuals, or as a group, used a business name in dealing with plaintiff for the purpose of contracting their services,
c. whether they listed themselves in any business capacity in city or telephone directories,
d. whether they maintained their own offices,
e. whether they procured necessary licenses for the carrying on of the business, or any other evidence tending to show that they were carrying on an independent business as individuals or as a group.
3. Right of Discharge - Does the employer have the authority at any time to discharge the person? An independent contractor cannot be fired so long as he produces a result which meets his contract specifications.
a. An employee has the right to end his relationship with his employer at any time he wishes without incurring liability. An independent contractor usually agrees to complete a specific job; he is responsible for its satisfactory completion or legally obligated to make good for failure to complete the job.
4. Right to Delegate - If the services must be rendered personally, presumably the employer is interested in the methods as well as the results. He is interested in not only the result but also the worker. This would indicate an employee.
5. Hiring, Firing and Paying - Hiring, supervising and paying assistants by the employer generally shows control over the persons on the job. Sometimes one worker may hire, supervise, and pay the other workers. He may do so as a result of a contract which he agrees to provide materials and labor and under which he is responsible for only the attainment of a result. In this case he is an independent contractor. On the other hand, if he hires, supervises and pays workers at the direction of the employer, he may be an employee acting in the capacity of a foreman for or representative of the employer.
6. Training - Training a person by an experienced employee working with him, by correspondence, by regular attendance at meetings, and by other methods indicates that the employer wants the service performed in a particular method or manner. This is especially true if the training is given periodically or at frequent intervals. An independent contractor ordinarily uses his own methods and receives no training from the purchaser of his services. In fact, it is usually his methods which bring him to the attention of the purchaser.
7. Skill - Less skilled occupations are more apt to be those of "employees" as opposed to those of "independent contractors".
8. Duration and Method of Payment - Importance is placed on the length of time for which the person is employed and the method of payment used, that is, whether the payment is by time or by the job.
If the time of employment is short, the worker is less apt to subject himself to control as to details and the job is more likely to be considered his job than the job of the one employing him. This is especially true if payment is to be made by the job and not by the hour.
9. Hours of Work - The establishment of set hours of work by the employer is a factor indicating control. This condition bars the worker from being master of his own time, which is the right of the independent contractor. If the nature of the occupation makes fixed hours impractical, a requirement that the worker work at certain times is an element of control.
10. Independent Trade - Is the person engaged in a distinct independent trade or business? Three factors looked at here are:
(1) Whether full-time is required by the "employer";
(2) Whether the worker is working for more than one firm at the time; and
(3) Whether the worker is making service available to the general public.
11. Tools and Place of Work - Naturally, a factor to be considered is whether the workman supplies the instrumentalities, tools, and place of work, or whether the taxpayer is supplying these things. The rationale is that when a valuable instrumentality is supplied by the "employer", it is normally understood that the worker will follow the directions of the owner in its use and, thus, the relationship tends towards one of employer/employee. An independent contractor generally furnishes his own tools.
Doing the work on the employer's premise in itself is not control. However, it does imply that the employer has control, especially when the work is the kind that could be done elsewhere. A person working in the employer's place of business is physically within the employer's direction and supervision. The use of desk space and telephone and stenographic service provided by an employer places the worker within the employer's direction and supervision. Work done off the premise indicates some freedom from control. However, this fact by itself does not mean that the worker is not an employee.
12. Profit and Loss - Does the worker bear the responsibly of earning a profit or a loss? The Service takes the position that the opportunity for profit or loss can be established by the fact that the individual hires, directs, and pays assistants; by the fact that the individuals has an office, equipment, materials, or other work facilities; by the fact that the individual has continuing and recurring liabilities obligations, and success or failure depends on the relationship of receipts to expenditures; by the fact that the individual agrees to perform specific jobs for prices agreed upon in advance and pays expenses incurred in connection with the work; and by the fact that the individual's services and those of the assistants establish or affect the worker's business reputation and not the reputation of those who purchased the services.
13. Labels - It is generally agreed that the label placed on the relationship is irrelevant if it does not represent the true substance of the relationship.
14. Intent - Which type of relationship do the parties really intend to create?
15. Business, Sequence, and Reports - Two things which are considered in this area are:
(1) The order or sequence set for performing a job and
(2) The requirement of oral or written reports.
16. Type of Work - If you find that the person performed the same type of work that is generally performed by regular employees and that he/she generally works side by side with the regular employees, then it is more likely that the person is an employee.
17. Industry Custom - Whether this type of job is usually done by an employee or an independent contractor is a factor which is considered.
This article was written by Nancy K. Phillips, CFP®, CPA and/or her staff. It is intended to provide you with an informative summary of current business, financial and/or tax planning news. Do not apply this general information to your specific situation without additional details and/or professional assistance.