Contract or Labor Employee?

Contract or Labor Employee?

Contract labor or employee? Many business owners find themselves asking this question. To help clarify, the Internal Revenue Service (IRS) came up with Common Law Rules to help characterize the degree of control and independence of hired workers. These two factors are critical in distinguishing between the two. Listed below are the Common Law Rules from the IRS website:

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

2. Financial: Are the business aspects of the worker's job controlled by the payer? (These include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

3.Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue, and is the work performed a key aspect of the business? 

Before making a determination, the IRS recommends to look at the entire relationship and weighing all factors above. Keep documentation supporting the factors of the classification is also advised.  If uncertainty remains, complete Form SS-8 and submit to the IRS for assistance with the classification process.

If after reviewing the Common Law Rules you discover that your workers have been misclassified, you may qualify to receive partial relief from federal employment taxes. This relief, known as the Voluntary Classification Settlement Program (VCSP), allows the opportunity to reclassify workers as employees in future tax periods and determinations are made on a case-by-case basis. To be able to participate in this program, certain eligibility requirements must be met. Also, the employer must agree to pay 10% of employment tax liability that would have been due on past compensation paid to misclassified workers. By making this agreement, the employer will not be liable for any interest or penalties on the past due employment tax and will not be subject to an employment tax audit in regards to worker classification. To find out more about the VCSP, please visit:

Additional information about the classification of workers and a copy of Form SS-8 can be found at:
Article by: Jessica Snead, Accounting Services

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