The Internal Revenue Service reminds employers to correctly determine whether workers are employees or independent contractors.
Generally, employers must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to employees. Business owners do not generally have to withhold or pay any taxes on payments to independent contractors.
Before a business can determine how to treat payments for services, they must first know the business relationship that exists between the business and the person performing the services. The person performing the services may be –
- An independent contractor
- An employee (common-law employee)
- A statutory employee
- A statutory nonemployee
Common Law Rules
Facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the business owner control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the business owner? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits such as pension plan, insurance or vacation pay? Will the relationship continue and is the work performed a key aspect of the business?
If, after reviewing the three categories of evidence, it is still unclear whether a worker is an employee or an independent contractor, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) can be filed with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status.
Be aware that it can take at least six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form SS-8 (PDF). There is no fee for requesting an SS-8 determination letter.
Employment Tax Obligations
Once a determination is made (whether by the business or by the IRS), the next step is filing the appropriate forms and paying the associated taxes.
Forms and Associated Taxes for Independent Contractors
- Form W-9: If you’ve made the determination that the person you’re paying is an independent contractor, the first step is to have the contractor complete Form W-9 (PDF), Request for Taxpayer Identification Number and Certification. This form can be used to request the correct name and Taxpayer Identification Number, or TIN, of the worker. A TIN may be either a Social Security Number (SSN), or an Employer Identification Number (EIN). The W-9 (PDF) should be kept in your files for four years for future reference in case of any questions from the worker or the IRS.
- Form 1099-MISC: is most commonly used by payers to report payments made in the course of a trade or business to others for services. If you paid someone who is not your employee, such as a subcontractor, attorney or accountant $600 or more for services provided during the year, a Form 1099-MISC (PDF) needs to be completed, and a copy of 1099-MISC (PDF) must be provided to the independent contractor by January 31 of the year following payment. You must also send a copy of this form to the IRS by February 28 (although the form does not have to be sent to the IRS until March 31 if the business files the 1099s electronically, using the FIRE system).
Also note that independent contractors may have their own employees or may hire other independent contractors (subcontractors). In either case, they should be aware of their tax responsibilities, including filing and reporting requirements, for these workers.
Misclassification of Employees
Consequences of Treating an Employee as an Independent Contractor
If a business classifies an employee as an independent contractor and they have no reasonable basis for doing so, they may be held liable for employment taxes for that worker and the relief provisions, discussed below, will not apply.
If a business has a reasonable basis for not treating a worker as an employee, they may be relieved from having to pay employment taxes for that worker. See Publication 1976, Section 530 Employment Tax Relief Requirements (PDF) for more information.
Misclassified Workers Can File Social Security Tax Form
Workers who believe they have been improperly classified as independent contractors by a business can use Form 8919, Uncollected Social Security and Medicare Tax on Wages to figure and report the employee’s share of uncollected Social Security and Medicare taxes due on their compensation. See the full article Misclassified Workers to File New Social Security Tax Form for more information.