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Who is an employee or an independent contractor?

Barry & Howard
pbs tax & bookkeeping service

We get many questions about hiring another driver and whether to pay him/her as an independent contractor or an employee.

Worker classification is currently a top audit target of the IRS. Many of you are concerned as to whether your workers are employees or independent contractors. It is important to have them properly classified because that classification can determine whether you need to pay employment taxes or provide health insurance and retirement plans.

FAQs

Question: Can a husband and wife run a business as a sole proprietor or do they need to be a partnership?

Answer: It is possible for either the husband or the wife to be the owner of the sole proprietor business. The other person could work in the business as an employee. If the spouses intend to carry on the business together and share in the profits and losses, they have formed a partnership.

Question: Are partners considered employees of a partnership or are they self-employed?

Answer: Partners are considered to be self-employed. If you are a member of a partnership that carries on a trade or business, your distributive share of its income or loss is net earnings from self-employment. Limited partners are subject to self-employment tax only on guaranteed payments, such as salary and professional fees for services rendered.

Question: I recently formed a limited liability company. The LLC has no employees. Do I need aseparate federal tax ID number for the LLC?

Answer: No, you will not need a separate federal tax ID number for the LLC if you are the sole owner of the LLC and the LLC has no employees. If you are not the sole owner of the LLC or if the LLC has employees, you will need a separate federal tax ID number for the LLC.

If the IRS reclassifies your independent contractors as employees, there can be some serious repercussions. You would not only be liable for back taxes, but interest and penalties that could be steep enough to put you out of business. Additionally, your retirement plan could lose its qualified status.

20 factors to show who is an independent contractor
Many businesses would rather pay independent contractors than employees to avoid paying payroll taxes and fringe benefits. In fact, many people would rather be independent contractors in order to make use of some of the tax advantages. It can be a win-win situation.

But be careful, because the IRS looks closely at who is and who is not an independent contractor. There are 20 factors that must be considered to determine independent contractor status. No special weight is given to any one of the factors. The factors are:

  • Few instructions are given about how, when and where the work is accomplished.
  • Little training is provided.
  • Services are not integrated with the company’s operations.
  • You are not required to perform the services personally.
  • You hire, supervise and pay assistants.
  • Your relationship with the company is not continuing.
  • You set your own working hours.
  • You do not work full-time for the company.
  • You do not work at the company’s location.
  • You set the steps in which the work will be done.
  • You are not required to submit written or oral reports.
  • You are paid by the job rather than by the week or month.
  • You are not reimbursed for business or traveling expenses.
  • You provide your own equipment and supplies.
  • You invest in the facilities you use for doing the work.
  • You can realize a profit or suffer a loss as a result of your services.
  • You work for many different companies at the same time.
  • Your services are available to the general public on a regular basis.
  • You cannot be fired as long as you produce the requested work.
  • You cannot terminate your relationship with the company until your work is complete.

This article has been presented by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping service to the trucking industry for more than a quarter century. Contributions to this article were made by Shasta May, director of business development for PBS. If you would like further information, please contact us at 1-800-697-5153. Visit our Web site at www.pbstax.com.

Everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.