Several stipulations have been created to determine the difference between an employee or an independent contractor, including work conditions and the control the employer has over the individuals work conditions and methods.
An employer – employee situation occurs when an employer has control over where the employee performs the work, the methods used by the employee to perform the work, and the physical details of the work performed. Employees are also generally paid by the hour or are on salary, the employer pays all applicable taxes on behalf of the employee (i.e. FICA, FICA excise tax, FUTA, IRS federal income tax withholdings, Medicare, and state taxes), and employers generally offer additional benefits to employees (i.e. healthcare benefits, preferred parking spaces, retirement plan, etc.).
An independent contractor does not receive the same privileges or restrictions as employees. Generally, an independent contractor is paid by the job performed; the employer does not have control over the way a job is performed, only the end result of the job based upon what the employer wants completed; he or she pays his or her own taxes; additional benefits are not offered by the employer; and employers are not held to the same discrimination and at-will relationships as with employees.
Four criteria exist to determine if an individual is considered an independent contractor:
- The individual must never have been a regular employee of the employer
- All prior federal tax returns must show consistency that this individual is consistently an independent contractor
- All positions within the employers business that are substantially similar must be consistently held by independent contractors
- A reasonable basis must be held by the employer for hiring and maintaining the independent contractor
If, at any time, an employer questions whether or not an individual should be classified as an employee or independent contractor, he or she may contact the IRS and request clarification. The IRS can always look into the employment relationship and question whether an individual is truly an independent contractor or not, and if not (but has been classified as one by the employer), the employer can face up to several thousands of dollars worth of fines and potential jail time for wrongfully categorizing the individual.
Does your company employ only straight employees or does your company also employ independent contractors?