ASK Score: Independent contractor or employee?

QUESTION: I am a general contractor and uncertain how the Internal Revenue Service views subcontractors. Are they independent contractors or my employees? ANSWER: The question of who is an independent contractor seems to be a constant source of confusion among many small businesses. One popular notion is that if an individual signs an independent contract agreement, the general contractor or employer has nothing to fear from the Internal Revenue Service. Such an agreement is not worth the paper it is written on, unless it meets certain IRS criteria. In determining whether the person providing the service is an employee or independent contractor, all information that provides evidence of the degree of control over the individual or subcontractor must be considered. If you incorrectly classify an employee as an independent contractor, you can be held liable for his or her employment taxes, plus a penalty. Who is an independent contractor? The general rule is that you, the payer or general contractor, have the right to control or direct only the result of the work done by the individual or subcontractor, but not the means and methods of accomplishing the result. Example: Jim, an electrician, submits a job estimate for work to be performed by a certain date. He comes and goes according to his own schedule and performs the work agreed upon without your supervision. He also performs similar work under contract for other individuals and general contractors. Jim meets the definition of an independent contractor. Who is an employee? Under common-law rules, anyone who performs services for you is your employee if you 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, the employer, have the right to control the details of how the work is performed. Example: John is a salesman employed full time by an auto dealership. He works six days a week, on duty at the dealer’s showroom. Although he has years of sales experience, he must attend weekly staff meetings and is responsible to the sales manager. He is paid a small salary and commissions on sales he generates. He is also receives life and health insurance benefits provided by the employer. John meets the definition of an employee. His employer must provide him with an annual IRS form W-2, stating all forms of compensation, including federal and state income taxes withheld and employer matching FICA taxes. The IRS website provides complete information on this topic as well as links to other related subjects.