How to Tell an Employee from an Independent Contractor

Posted by marykeating on September 4, 2009 under Wage and hour issues | Be the First to Comment

In a previous post, I commented on the steps Maryland is taking to combat the misclassifications of employees as independent contractors. While the state and federal tests are not identical, the basic tests are the same. If an employer exerts control over the place, manner, and hours of work, the person is likely an employee. Independent contractors often have their own places of business, equipment, and are hired to perform a specific function or job, not put in a certain number or hours.

In the gray areas, though, it may be tough to make the final call.   You can read the IRS training manual, a 160-page report that should be able to answer most questions.  The Internal Revenue Service has simpler guidelines on its website as well. You may not know, though, that IRS will give an opinion on a specific situation, if asked by the employer or the employee/independent contractor. Exercising this degree of due diligence will negate any accusation of bad faith or exploitation.

One main reason that employers may misclassify a worker as an independent contractor is to avoid paying FICA taxes, which amounts to 7.65% of the compensation. An independent contractor pays that amount as self-employmetn tax.  A worker who has been misclassified can file a form with his or her taxes that shifts the responsibility for that 7.65% to the employer.  The explanation is here.