Brady and Associates, LLC

Serving your financial needs today and tomorrow

Independent Contractors or Employee?

There are four types of business relationships with person performing the services that exist:

· An independent contractor

· A common-law employee

· A statutory employee

· A statutory non-employee

In determining whether the person providing service is an employee or an independent contractor, one must consider the degree of control and independence. 

Independent Contractor
The payer has the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.  A business must file Form 1099-MISC, Miscellaneous Income, to report payments of $600 or more to independent contractors for services performed.   Employers do not have to withhold or pay taxes on payments to independent contractors.

Employee
Anyone who performs services for you is your employee 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. You must withhold income, Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee.

Statutory Employees
If workers are independent contractors, such workers may nevertheless be treated as employees by statute (statutory employees) for certain employment tax purposes if they fall within any one of the following four categories and meet the three conditions described under Social security and Medicare taxes, below.

· A driver who distributes food products or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.

· A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.

· An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you furnish specifications for the work to be done.

· A full-time traveling or city salesperson who works on your behalf and turns in orders to you.  The goods sold must be merchandise for resale or supplies for use in the buyers business operation. The work performed for you must be the salespersons principal business activity.

Statutory Non-employees
There are two categories of statutory non-employees: direct sellers and licensed real estate agents. They are treated as self-employed for all Federal tax purposes, including income and employment taxes, if:

· Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked and

· Their services are performed under a written contract providing that they will not be treated as employees for Federal tax purposes.

If you incorrectly classify an employee as an independent contractor, the business and its owner can be held liable for employment taxes plus a penalty.