An Independent Contractor or an Employee?

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It is important as a business owner to correctly decide if someone is an employee or an independent contractor. There is a general rule for determining one from the other:

• Independent Contractor ” According to the IRS, a person is considered an independent contractor if you, the business owner, have the right to control or direct only the result of the work and not the means and methods of accomplishing that work. A periodic bookkeeper is an example of an independent contractor because he or she was hired for a specific skill and required no training from you. Be smart and write out a simple agreement with an independent contractor that describes what he or she will do for you. Ask the contractor to provide you with invoices.

• Employee ” According to the IRS, a person is considered an employee of your business if you can control what will be done and how it will be done. If someone is an employee then you will have to withhold income taxes, withhold and pay Social Security and Medicare taxes (FICA), pay unemployment tax on wages paid to the employee, and possibly other fringe benefits.

What can happen to a business owner if he or she incorrectly claims someone as an independent contractor instead of an employee? Unfortunately, the IRS expects you to make this determination correctly because if not then you can be held liable for back employment taxes for that person plus accrued interest and penalties. Determining the difference between the two can be confusing and expensive if you make a mistake. For instance, typically a lawyer is considered an independent contractor, but he or she can also be an employee. To sort this all out, the IRS provides specific guidelines in Publication 15-A ( Employer's Supplemental Tax Guide ).

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