June 2007

Employee or Independent Contractor 
By Roger Maag

        Whether someone who works for you is an employee or an independent contractor is an important question. The answer determines your liability to pay and withhold Federal income tax, Social Security and Medicare taxes and Federal and State unemployment taxes as well as Workers Compensation insurance.

        In general, someone who performs services for you is your employee if you can control what will be done and how it will be done.

        The courts have considered many facts in deciding whether a worker is an independent contractor or an employee. These facts fall into three main categories:

Behavioral Control - Facts that show whether the business has a right to direct and control. These include: 

        º  Instructions - an employee is generally told: 
                 º when, where, and how to work 
                 º what tools or equipment to use 
                 º what workers to hire to assist with the work 
                 º where to purchase supplies and services 
        º   If you receive less extensive instructions about what should be done, but not how it should
            be done, you may be an independent contractor. For instance, instructions about time and
            place may be less important than directions on how the work is performed. 
         º Training - an employee may be trained to perform services in a particular manner. 

Financial Control - facts that show whether the business has a right to control the business aspects of the worker's job include: 
         º The extent to which the worker has unreimbursed expenses 
         º The extent of the worker's investment 
         º The extent to which the worker makes services available to the relevant market 
         º How the business pays the worker 
         º The extent to which the worker can realize a profit or loss 

Type of Relationship - Facts that show the type of relationship include: 
         º Written contracts describing the relationship the parties intended to create 
         º Whether the worker is provided with employee type benefits 
         º The permanency of the relationship 
         º How integral the services are to the principal activity

For a worker who is considered your employee, you are responsible for: 
         º Withholding Federal income tax 
         º Withholding and paying the employer Social Security and Medicare tax 
         º Paying Federal and State unemployment taxes (FUTA and SUTA) 
         º Paying State Workers' Compensation insurance 
         º Issuing Form W-2, Wage and Tax Statement, annually, 
         º Reporting wages on Form 941, Employer's Quarterly Federal Tax Return

 When you are an independent contractor 
         º The business may be required to give you Form 1099-MISC, Miscellaneous Income, to report
            what it has paid to you. 
         º You are responsible for paying your own income tax and self-employment tax. The business
           does not withhold taxes from your pay. You may need to make quarterly estimated tax
            payments during the year to cover your tax liabilities. 
         º You may deduct business expenses on Schedule C of your income tax return.

Certified Public Accountants

     1035 N. Main Street, Findlay, OH 45840  -  Phone: 419-422-8111  -  Fax: 419-422-5969
   2453 West Market Street, Tiffin, OH 44883  -  Phone: 419-448-8555  -  Fax: 419-448-5885

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