As a business owner here in Connecticut, you may have people working for you. How you classify them determines whether you owe payroll taxes. If you improperly classify an employee as a contractor and fail to make payroll tax payments, you could end up on the IRS's radar.
Therefore, it would be in your best interest to understand the difference between an employee and a contractor. Making that determination often rests in the 20-factor analysis created by the IRS to determine whether a worker is an employee.
The most important distinction
Of all of the factors that distinguish an employee from an independent contractor, the vital one is the amount of control you have over the individual. If you dictate where, how and when an individual does work for you, he or she is an employee. If you can direct the way that person works and control how he or she works, you have an employee.
No matter how much freedom you give someone as he or she performs the duties you assign, your control negates the contention of an independent contractor. Whether you exercise control over a worker depends on a variety of factors. You may have difficulty figuring out if the control you have over someone who works for you is enough to meet the threshold of being an employee.
How the IRS attempts to clarify the situation
In order to help you determine the difference between an independent contract and an employee, the IRS provides the following three options:
- The IRS publishes the 20 factors that its auditors use to make this determination.
- If that doesn't help, you may be able to treat someone as an independent contractor for tax purposes under the "safe haven" rule even if that person may be an employee under the common law rule.
- If you still aren't sure, you could ask the IRS to make the determination.
The 20 factors fall into three general categories:
- You control how an individual performs his or her work.
- You control the relationship between you and the worker.
- You control financial aspects of the worker's business activities.
If all of this seems largely subjective to you, you may not be wrong. Even if you believe you correctly classified a worker, the IRS may not agree.
You may need additional help
If you end up in a dispute with the IRS regarding the classification of an employee, you may need help. An experienced tax attorney could prove invaluable in active disputes and even help you avoid future problems.