Employee or Independent Contractor
Samford University pays a large number of people as independent contractors every month. These people perform a wide variety of services for the university. It is important that we always ensure that the status of these persons as an independent contractor is accurate.
How does a person acquire independent contractor status? It is not because we choose to designate them as such; it is not because they want to be designated as such. It is solely because they meet the definition of independent contractor as defined by the Internal Revenue Service.
The IRS has an interest in this because independent contractors do not pay their taxes on a payroll deduction basis; they have to file and pay their taxes quarterly. Actual employees, on the other hand, pay taxes as they go on a payroll deduction basis. Therefore, the IRS does take an interest if they feel that people are being defined incorrectly as independent contractors.
Below is a review of independent contractor versus employee. This information came from the Internal Revenue Service's website:
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 unemployment tax.
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.
It is critical that you, the employer, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.
Caution: If you incorrectly classify an employee as an independent contractor, we (Samford University) can be held liable for employment taxes for that worker, plus a penalty.
Who is an Independent Contractor? A general rule is that you, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.
Who is an Employee? 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.
To determine whether an individual is an employee or independent contractor under the common law, the relationship of the worker and the business must be examined. All evidence of control and independence must be considered. In an employee-independent contractor determination, all information that provides evidence of the degree of control and degree of independence must be considered.
Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties:
- Behavioral Control – Facts that show whether the business has a right to direct and control. These include:
- Instructions - an employee is generally told:
- when, where, and how to work
- what tools or equipment to use
- what workers to hire or to assist with the work
- where to purchase supplies and services
- what work must be performed by a specified individual
- what order or sequence to follow
- 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:
- The extent to which the worker has un-reimbursed expenses
- The extent of the worker's investment
- The extent to which the worker makes services available to the relevant market
- How the business pays the worker
- The extent to which the worker can realize a profit or loss
- Type of Relationship – Facts that show the type of relationship include:
- Written contracts describing the relationship the parties intended to create
- Whether the worker is provided with employee-type benefits
- The permanency of the relationship
- How integral the services are to the principal activity
For a worker who is considered our employee, we are responsible for:
- Withholding Federal income tax,
- Withholding and paying the employer social security and Medicare tax,
- Paying Federal unemployment tax (FUTA)
- Issuing Form W-2, Wage and Tax Statement, annually,
- Reporting wages on Form 941, Employer's Quarterly Federal Tax Return.