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Employee or Independent Contractor? Understanding Employee Job Classification

It is essential for any employer to understand the differences between an employee and an independent contractor. Employers have the following tax responsibilities with regard to each employee:

  • Calculate and withhold income taxes
  • Calculate and withhold Social Security and Medicare taxes

The factors used by the IRS in determining whether an employee is an independent contractor include the following:

  • Behavior: The IRS evaluates the extent that an employer directs and controls the behavior of an independent contractor. This includes the amount and type of training provided, as well as the evaluation of work performed.
  • Financial:The IRS investigates the degree to which an employer controls the economic conditions surrounding the production of goods or provision of services. Factors reflecting independence of the employee including exposure to financial loss or gain, investment in equipment needed to perform work and open market availability.
  • Relationship:Perhaps the clearest evidence of the relationship between employer and independent contractor is the presence of a work contract, any payment of benefits, reimbursement for expenses, permanency of the relationship and the degree to which services provided by an independent contractor are essential to the business activity of the employer.

An employer is financially responsible for taxes due if an employee is improperly classified as an independent contractor. If you have concerns about taxes and your labor force, speak with Tobin, O’Connor & Ewing for reputable legal guidance.

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