Employee Versus Contractor
Federal and state governments require employers to serve as tax collectors. As such, each employer must withhold Social Security Tax, Federal Income Tax, and State Income Tax from each employee paycheck. In addition, employers are required to match employees' Social Security "contributions" and pay Federal Unemployment Tax (FUTA). To avoid the additional burden of FICA matching and Unemployment, some small businesses illegally report their employees as independent contractors instead of as employees.
IRS Form SS-8 (Determination of Employee Work Status for the Purpose of Federal Income Tax Employment Tax Withholding) and Publication 334 (Tax Guide For Small Business) both define in detail the legal differences between employees and contractors. You can order any IRS form or Publication by calling 1-800-829-3676.
According to Publication 334, "the general rule is that an indivitual is an independent contractor if [the employer has] the right to control or direct only the result of the work and not the means and methods of accomplishing that result. Two usual characteristics of an employer-employee relationship are that the employer has the right to discharge the employee and the employer supplies tools and a place to work.
The acronym "ETC" summarizes some of the criterion for determining whether a worker is an employee or a contractor:
E = exclusivity: Does the worker work exclusively for one employer? If they only work for a single employer, especially if they are required to agree to only work for that employer, this worker would most likely be an employee and not a contractor.
T = tools: Does the worker or the employer supply the tools to accomplish the job? Typically independent contractors supply their own tools, equipment, software, and so on, whereas for employees, their employer supplies these tools.
C = control: Who determines how the work is accomplished? If a worker is able to determine how, where, or when they accomplish their work, they are typically contractors. If an employer determines these factors, the worker is more likely classified as an employee.
Accounting Made Easy, Module I of the Professional Bookkeeper™ Program, explains the Employee Versus Contractor distinction in detail.
Click HERE to see what else is taught in Module I.
