One common question that many business owners will have is “Am I hiring an independent contractor or an employee?” While most business owners want to hire everyone as independent contractors, this can cause a lot of trouble if the new hire is mis-classified. The IRS has issued a lot of guidance on how to classify any new hire, but in true IRS fashion, this can cause more confusion than guidance. Let’s examine the three main areas in simpler terms.
- Will you be telling the new hire how, when and where to work?
- Will you be providing the equipment necessary to do the job?
- Will you be training on procedures and methods to complete the job?
If your answer to any of these is “Yes”, the new hire is probably an employee. If not, there are still more tests!
- Is the new hire responsible for expenses related to their new job?
- Does the new hire make their services available to the general public?
- Could the new hire LOSE money performing the work?
If you answered “No” to any of these questions, the new hire is probably an employee. If not, there’s still one more hurdle to complete!
Type of Relationship
- Will the new hire get benefits normally attributable only to employees (health insurance, 401(k), sick pay, vacation etc.)?
- Is this an open-ended position with no end date in mind?
- Does this person look like and act like an employee with the general public?
If you answered “Yes” to any of these questions, the new hire is probably an employee.
For additional information on classifying independent contractors or employees, contact Nick Swedberg, CPA at firstname.lastname@example.org
The key to the relationship tests actually boils down to the famous quote by James Whitcomb Riley, “When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck.” One last bit of advice: Don’t listen to the duck! Many new hires will want to be treated as an independent contractor because they feel like they earn more money (a common misconception, but that’s another blog). However, the IRS does not take into account the desire of the new hire. If you get it wrong, YOU are liable, not the new hire, so be sure to classify with care!