Contractor or employee? Choose wisely

Janet Arrowood

Is that person working for you an independent contractor or employee? Before you make the wrong classification, visit the Internal Revenue Service website at and check out the tax tips section.

According to the IRS, the way to determine whether someone is a contractor or employee depends on three factors:

Behavioral control. Does the company control or have the right to control what the worker does and how the worker does the job?

Financial control. Does the business control the financial and business aspects of the worker’s job? Are the business aspects controlled by the payer? Consider how the worker is paid, expenses are reimbursed and who provides tools and supplies.

Relationships of the parties. Are there written contracts or such employee benefits as insurance, pensions or vacation pay? Will the relationship continue? Is the work performed a key aspect of the business?

If someone is an employee, your business must withhold and pay state and federal income taxes, Social Security and Medicare taxes (both employee and employer contributions) as well as unemployment taxes. In Colorado, you also must comply with  the Family Medical Leave and Insurance Program contribution and withholding requirements.

If you don’t withhold the required taxes and make the required contributions on time and the person doing work for you is later determined to be an employee, there could be substantial penalties, interest charges and other consequences.

How do you decide if someone is an independent contractor? From the company’s perspective, independent contractors are essentially self-employed. According to the IRS, people are
self-employed if any of the following apply to them:

They carry on a trade or business as a sole proprietor or independent contractor. Their businesses could be a corporation, even with a single employee.

They’re a member of a partnership or corporation that carries on a trade or business.

They’re otherwise in business for themselves, including part-time operations.

Self-employed individuals, including those who earn money from gig economy work, are generally required to file a tax return and make estimated quarterly tax payments. They also must pay self-employment tax, which is Social Security and Medicare taxes as well as state and federal income taxes and unemployment taxes.

If you misclassify someone as an independent contractor  —which happens more often than you might think — that person could seek a determination of worker status from the IRS, especially if they haven’t been filing their quarterly taxes or other payments. If the IRS rules the person is your employee and not an independent contractor, you could have to pay substantial sums for back taxes and other costs.

An employer can take a proactive step by completing a form SS-8, determination of worker status for purposes of federal employment taxes and income tax withholding — This form can be completed and submitted by either the employer or employee.

This column relies on information from the IRS website. Employers should visit the site and explore the information related to their particular situations. None of the preceding is intended as employment, legal, tax or other advice.