Employees Versus Independent Contractors

Part of the process of setting up your company in QuickBooks is choosing how to pay the people who work for you. Not everyone who works for you is an employee. QuickBooks defines employees as people who you pay for services and from whom you deduct taxes, sending that money on behalf of the employee to state and federal tax agencies. Independent contractors, on the other hand, are people you hire to do a particular job and are not your employees. You don't withhold taxes from their paychecks.

Sometimes determining whether someone who works for you is an employee or an independent contractor is difficult, so the IRS has attempted to simplify the process of distinguishing one from the other. The IRS has published a list of 20 questions to help determine whether a worker is an employee or a contractor. There's no set number of right or wrong answers that determines how to classify the worker. Generally, the more positive answers you give to these questions, the more likely the person is an employee rather than an independent contactor:

1. Do you (as the person paying the worker) give the worker instructions that he is expected to obey?

2. Does your company provide the worker with training?

3. Are the worker's services integrated into the regular business operation of your company?

4. Is it a requirement that the worker, personally, provide the services?

5. Is the worker prohibited from subcontracting the work?

6. Is the business relationship between your company and the worker an ongoing one?

7. Do you set the hours for the worker?

8. Is the worker expected to work full time for your organization?

9. Is the work performed on your company's premises?

10. Do you instruct the worker regarding the order in which to perform his tasks?

11. Is the worker expected to submit reports (oral or written) that summarize his work progress?

12. Does the worker receive payments at regular intervals, such as weekly or monthly?

13. Does the worker get reimbursed for business and travel expenses?

14. Does your company supply the tools and supplies for this worker?

15. Does the worker have little or no significant investment in the tools used to perform the job?

16. Is the company responsible for absorbing any loss resulting from the work performed?

17. Is the worker prohibited from working for more than one company or person at a time?

18. Is the worker prohibited from making his services available to the general public?

19. Is it the company's responsibility if the worker does not perform to the specifications of the project?

20. Is the company responsible if the worker causes any damage?