How do you know when someone is an employee or an independent contractor?
First, check out what the IRS has to say on the matter at their employee versus independent contractor web page. After all it's what they have to say that really matters if their is ever a question about how you handled this matter. In general, here as some guidelines to follow:
If the following is mostly true, the person should be treated as an employee; if the following is mostly not true, then they might be an independent contractor (always check with your accountant and the IRS guidelines before making any determination that you are not sure about):
- you set their pay rates
- you provide all the tools and training for the job
- the person only works for you
- if the person does not follow your rules or show up, they can be let go
- the person does not have their own business
In general, if you are in charge they should be treated as an employee. The more the job and payment for the job are not in your control, the greater the likelihood an independent status might exist. There is no way that someone can sign a letter declaring that they are independent and responsible for their own taxes-either you are or you are not according to the IRS guidelines. If necessary the IRS will make a determination for you. If they decide that the person should have been treated as an employee, the employer will be responsible for any withholding that has not been paid, plus penalties and interest, should they apply.
A common mistake made by employers who use legitimate independent contractors concerns Workmen's Compensation insurance. If an independent contractor working for you does not carry their own policy, then they must be covered under your policy. Don't be surprised by a large adjustment in your policy rate for uncovered independent contractors-always get a binder from the contractor for proof of coverage before they work for you.