Independent Contractor or Employee?

Which is the right one?

In this issue we’ll be discussing your workers’ classification.

Each year across the country, thousands of fitness centers make an attempt to do their tax returns by filing the appropriate forms for their workers’ with 1099’s or W-2’s being issued. Classifying an employee/worker incorrectly can spell trouble if you don’t understand the guidelines. We know your workers’ want the most take home pay they can, but correctly classifying them can save you thousands of dollars and a big headache if you’re audited by the IRS and/or Workers’ Compensation.      
For federal tax purposes, this is an important distinction. Worker classification affects how you pay your federal income tax, social security and Medicare taxes, and how you file your tax return. Classification affects your eligibility for employer and social security and Medicare benefits and your tax responsibilities. If you aren’t sure of your work status, you should find out as soon as possible.

The courts have considered many facts in deciding whether a worker is an independent contractor or an employee. These relevant facts fall into three main categories:

  • behavioral control
  • financial control and
  • relationship of the parties. 
Please place your comments in the section below. Your participation is encouraged and appreciated. Thank you!

In each case, it is very important to consider all the facts – no single fact provides the answer. Carefully review the following definitions.

Behavioral Control - These facts show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work. For example: Instructions – if you receive extensive instructions on how work is to be done, this suggests that you are an employee. Instructions can cover a wide range of topics, for example: How, when, or where to do the work, what tools or equipment to use what assistants to hire to help with the work, where to purchase supplies and services. If you receive less extensive instructions about what should be done, but not how it should be done, you may be an independent contractor. For instance, instructions about time and place may be less important than directions on how the work is performed with training about required procedures and methods, this indicates that the business wants the work done in a certain way, and this suggests that you may be an employee.

Financial Control - These facts show whether there is a right to direct or control the business part of the work. For example: Significant Investment – if you have a significant investment in your work, you may be an independent contractor. While there is no precise dollar test, the investment must have substance. However, a significant investment is not necessary to be an independent contractor. Expenses – if you are not reimbursed for some or all business expenses, then you may be an independent contractor, especially if your unreimbursed business expenses are high. Opportunity for Profit or Loss – if you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor.

Relationship of the Parties - These are facts that illustrate how the business and the worker perceive their relationship. For example: Employee Benefits – if you receive benefits, such as insurance, pension, or paid leave, this is an indication that you may be an employee. If you do not receive benefits, however, you could be either an employee or an independent contractor. Written Contracts – a written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts.

The status of a worker as an employee of a company rather than an independent contractor is important for determining who is to pay the payroll taxes or to wage withholding taxes. If the worker is considered an independent contractor, then the employer would not withhold any taxes from the independent contractor's payments. The employer would provide the independent contractor with gross sums and would submit a 1099 tax form to the IRS reflecting its payments to the Independent Contractor. It would be the Independent Contractors responsibility to maintain its own records and file its forms independently.

If the worker is considered an employee, then the employer is responsible for paying social security, Medicare, and unemployment (FUTA) taxes on the wages. The employer must provide a Form W-2, Wage and Tax Statement at the end of the year, showing the amount of taxes withheld from the employees pay.

Visit the IRS website for more detailed information on this subject.

For more on this subject, give us a call at 925-672-4800 and we will gladly do our best to answer your questions.