www.irs.gov/businesses/small/article/0,,id=99921,00.html
Employees Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and t he person performing the services. The person performing the services ma y be - * An independent contractor * A common-law employee (Employee) * A statutory employee * A statutory nonemployee In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the de gree of control and independence must be considered. It is critical that you, the employer, correctly determine whether the in dividuals providing services are employees or independent contractors. G enerally, you must withhold income taxes, withhold and pay Social Securi ty and Medicare taxes, and pay unemployment tax on wages paid to an empl oyee. You do not generally have to withhold or pay any taxes on payments to independent contractors. Caution: If you incorrectly classify an employee as an independent contra ctor, you can be held liable for employment taxes for that worker, plus a penalty. A general rule is that you, the payer, have the right to control or direc t only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result. Example: Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. She is to receive $1,280 every 2 weeks for the next 10 weeks. Even if she works more or less than 400 hour s to complete the work, Vera Elm will receive $6,400. She also perform s additional electrical installations under contracts with other compan ies, that she obtained through advertisements. How should I report payments made to independent contractors? You may be required to file information returns to report certain types o f payments made to independent contractors during the year. For example , you must file Form 1099-MISC, Miscellaneous Income, to report payments of $600 or more to persons not treated as employees (eg independent c ontractors) for services performed for your trade or business.
Under common-law rules, anyone who performs services for you is your empl oyee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed. To determine whether an individual is an employee or independent contract or under the common law, the relationship of the worker and the business must be examined. All evidence of control and independence must be cons idered. In an employee-independent contractor determination, all informa tion that provides evidence of the degree of control and degree of indep endence must be considered. Facts that provide evidence of the degree of control and independence fal l into three categories: behavioral control, financial control, and the type of relationship of the parties.
Empl oyer's Supplemental Tax Guide for additional information. A general rule is that anyone who performs services for you is your emplo yee if you can control what will be done and how it will be done. Example: Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. She works 6 days a week, and is on duty in Bob's showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager's approval. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Bob. Bob also pays the cost of health in surance and group-term life insurance for Donna. Statutory Employees If workers are independent contractors under the common law rules, such w orkers may nevertheless be treated as employees by statute ( statutory e mployees ) for certain employment tax purposes if they fall within any o ne of the following four categories and meet the three conditions descri bed under Social security and Medicare taxes , below. The goods sold must be merchandise for resale or supplies for use in the buyer s business operation. The work performed for you must be the salesperson s principal business activity. Refer to the Salesperson section located in Publication 15-A, Employer s Supplemental Tax Guide for additional information. Statutory Nonemployees There are two categories of statutory nonemployees: direct sellers and li censed real estate agents. They are treated as self-employed for all Fed eral tax purposes, including income and employment taxes, if: 1 Substantially all payments for their services as direct sellers or re al estate agents are directly related to sales or other output, rather than to the number of hours worked and 2 Their services are performed under a written contract providing that they will not be treated as employees for Federal tax purposes.
Publication 15-A, E mployer s Supplemental Tax Guide for additional information. Misclassification of Employees Consequences of treating an employee as an independent contractor. If yo u classify an employee as an independent contractor and you have no reas onable basis for doing so, you may be held liable for employment taxes f or that worker. See Internal Revenue Code section 3509 for additional i nformation.
Tax Topic 762 Basic Information To determine whether a worker is an independent contractor or an employee, you must examine the relationship between the worker and the business. All evidence of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories Behavioral Control, Financial Control, and the Type of Relationship itself.
Publication 1976, Section 530 Employment Tax Relief Requirements (PDF) Section 530 provides businesses with relief from Federal employment tax obligations if certain requirements are met.
IRS Internal Training: Employee/Independent Contractor (PDF) This manual provides you with the tools to make correct determinations of worker classifications. It discusses facts that may indicate the existence of an independent contractor or an employer-employee relationship. This training manual is a guide and is not legally binding. If you would like the IRS to make the determination of worker status, please file IRS Form SS-8.
Publication 15-B The Employers Tax Guide to Fringe Benefits supplements Circular E (Pub. It contains specialized and detailed information on the employment tax treatment of fringe benefits.
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