With the birth of the virtual office, we have seen more companies utilizing independent contractors rather than hiring full-time employees. While this work style allows for flexibility with contractors and full-time employees, it is critical that business owners correctly determine which bucket the individuals providing services fall under.
If you are a business owner hiring or contracting with other individuals to provide services, you must determine whether the individuals providing services are employees or independent contractors.
- Employees: You must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee.
- Contractors: You do not have to withhold or pay any taxes on payments to independent contractors.
4 Classifications of Business Relationship
The person performing the services may fall into one of the four classifications.
- Independent Contractor – The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.
- Employee (Common Law) – Under common-law rules, anyone who performs services for you is your employee if you can 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 have the right to control the details of how the services are performed.
- Statutory Employee – An individual who serves as a driver or delivery person, a full-time insurance salesperson for one insurance company, someone who works at home with goods that must be returned and a full-time traveling salesperson who produces orders for your company.
- Nonstatutory Employee – This includes a direct seller of your product or service, a licensed real estate person and certain companion sitters. There’s no clear-cut answer to this question, but the key is to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
If you need guidance in effectively managing your payroll, contact your local LBMC Employment Partners’ representative. As one of the top payroll companies in Tennessee, LBMC Employment Partners, LLC, will help guide you through each and every step of the way—from managing payroll to outsourcing payroll to payroll tax services—ensuring that you are in compliance with all tax codes. Not only that, but working with LBMC Employment Partners will help you avoid penalties: your payroll taxes will be filed correctly and on time.