From the Desk of Lauran Corcoran, Associate Attorney
Employee or Independent Contractor? An existential-like question posed to many taxpayers
The IRS asks taxpayers to categorize payments made for services as either 1) payment made to an employee or 2) payment to an independent contractor.
Wikipedia explains, “Existentialist thinkers focus on the question of concrete human existence and the conditions of this existence rather than hypothesizing a human essence, stressing that the human essence is determined through life choices. Furthermore, a central proposition of existentialism is that existence precedes essence, which means that the actual life of the individual is what constitutes what could be called his or her “essence” instead of there being a predetermined essence that defines what it is to be a human.”
If life choices determine the human essence and his or her existence is determined by this human essence, then those choices that may be categorized in different ways have an effect on who that person is. Before discussing how the IRS categorizes these distinctions for the payor and the payee, let’s consider the philosophical and psychological aspects of this question that turns into an existential question. For the payor, the IRS is asking them who they are, perhaps the most demanding question that can be asked. Essentially, the payor must question and decide exactly what their existence is: are they an employer, an actual business that is successful enough to employ others, or are paying for the services of another business? For the payee, the IRS is also asking them to define who they are, are they employed by someone else or are they their own employer? Such distinctions for both the payor and payee, in existentialist terms the “life choices” that these distinctions embody, provide the essence of that person.
The IRS website provides a road map for determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. Facts that provide evidence of the degree of control and independence fall into three categories: 1) Behavioral, 2) Financial and 3) Type of Relationship.
Behavioral
Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done, as long as the employer has the right to direct and control the work.
Financial
Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job.
Type of Relationship
Type of relationship refers to facts that show how the worker and business perceive their relationship to each other.
After considering the evidence from each category, the IRS cautions that “There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no single factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.” Furthermore, “the keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.” If in the end it is unclear whether the worker is an employee or independent contractor (and how could it be?), Form SS-8 (found on the IRS website) can be filed with the IRS by either the payor or the payee for an official determination of the payee’s status by the IRS.
Of course what matters most is the differences in taxation for a business that employs workers as employees or as independent contractors and the difference in taxation for a worker who is considered an employee or an independent contractor. The most important difference is that as an employee your employer is responsible for paying employment taxes (i.e., Social Security and Medicare taxes) and if you are an independent contractor you are responsible for paying employment taxes because you are your own employer.
The IRS is concerned with status of workers for a multiple of other reasons (including corporations taking deductions for salaries to employees and other ways to take deductions in an abusive manner) but the IRS is clearly mandating that payment for services rendered will not bypass employment tax and someone, the worker or business, is on the hook for that tax. Furthermore, if a worker or a business attempts to avoid this liability by classifying the worker as an independent contractor when the worker is an employee, they will be liable for the taxes and possibly liable for penalties for the misclassified payment.