Employee or Independent Contractor?

  • Robert S. Thomas,
  •   Taxation
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Employee or Independent Contractor

If you own a small business, you know that every operational decision matters. One of the more important decisions is when to hire employees for your business or when to utilize independent contractors. The two are entirely distinct classifications and knowing the difference matters a great deal.

If you misclassify your employees as independent contractors, your business is potentially violating numerous state and federal laws. These include minimum wage laws, Illinois Department of Labor (IDOL) laws, worker’s comp laws, unemployment laws, IRS and state employee withholding laws, and FICO Social Security and Medicare withholding laws.

Federally, the IRS will investigate and enforce, while in Illinois, the Illinois Department of Employment Security (IDES) will investigate and enforce whether a business is properly classifying employees and independent contractors. Small businesses are especially susceptible to scrutiny. It is therefore essential to understand the difference between employees and independent contractors and to follow the law.

What the IRS Looks For

The IRS looks at the totality of the relationship between the individual and the business, focusing on the business’ control over the individual and the individual’s degree of independence. This includes examining its:

  1. Behavioral control, which looks at the business’s ability to dictate what work is done, how work is done, and whether the individual has to undergo training.
  2. Financial control, looks at the business’s ability to control the financial and business aspects of the individual’s job, including what they are paid, their ability to profit, how much the individual has to pay out of pocket for expenses and equipment, and the individual’s ability to provide the same service for others.
  3. Other aspects of the relationship. These may include whether the individual’s services are essential to the company, whether there is a contract in place, and whether the individual is receiving benefits from the business.

For those truly in doubt, the IRS can make a determination of whether an individual is an employee or independent contractor for IRS purposes. This can be accomplished by filing Form SS-8.

What the IDES Examines

The IDES considers the following factors when a business attempts to establish that a person is an independent contractor, and not an employee:

  • “Such individual has been and will continue to be free from control or direction over the performance of such services, both under his contract of service and in fact”;
  • “Such service is either outside the usual course of the business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed”; and
  • “Such individual is engaged in an independently established trade, occupation, profession, or business.”

An Attorney Can Help You

Classifying an individual as an independent contractor is a risk if you are unfamiliar with applicable laws. If you have any questions or need some guidance, contact The Law Offices of Robert S. Thomas. I understand the importance of complying with tax laws and can make sure that your business is operating efficiently and legally. I have been a tax attorney for over two decades and have a Master of Law Degree (LLM) in Taxation, and a license to practice in the United States Tax Court. Contact The Law Offices of Robert S. Thomas at 847-392-5893 to schedule an appointment or visit our website today.

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