The freely available Adobe Acrobat Reader software
is required to view and print the form.
Independent Contractor Or Employee, IRS Publication 1779
Independent Contractors vs. Employees
Before you can determine how to treat payments you make for services, you must first
know the business relationship that exists between you and the person performing
the services. The person performing the services may be -
- An independent contractor
- A common-law employee (Employee)
- A statutory employee
- A statutory nonemployee
In determining whether the person providing service is an employee or an independent
contractor, all information that provides evidence of the degree of control and
independence must be considered.
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, you 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.
Example: Vera Elm, an electrician, submitted a job estimate to
a housing complex for electrical work at $16 per hour for 400 hours. She is
to receive $1,280 every 2 weeks for the next 10 weeks. This is not considered
payment by the hour. Even if she works more or less than 400 hours to complete
the work, Vera Elm will receive $6,400. She also performs additional electrical
installations under contracts with other companies, that she obtained through advertisements.
Vera is an independent contractor.
How should I report payments made to independent contractors?
You may be required to file information returns to report certain types of payments
made to independent contractors during the year. For example, you must file
Form 1099-MISC, Miscellaneous Income, to report payments of $600 or more to persons
not treated as employees (e.g. independent contractors) for services performed for
your trade or business. For details about filing Form 1099 and for information
about required electronic or magnetic media filing, refer to information returns.
Who is a Common-Law Employees (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. Refer to Publication 15-A,
Employer's Supplemental Tax Guide for additional information.
Who is an Employee?
A general rule is that anyone who performs services for you is your employee
if you can control what will be done and how it will be done.
Example: Donna Lee is a salesperson employed on a full-time basis
by Bob Blue, an auto dealer. She works 6 days a week, and is on duty in Bob's showroom
on certain assigned days and times. She appraises trade-ins, but her appraisals
are subject to the sales manager's approval. Lists of prospective customers belong
to the dealer. She has to develop leads and report results to the sales manager.
Because of her experience, she requires only minimal assistance in closing and financing
sales and in other phases of her work. She is paid a commission and is eligible
for prizes and bonuses offered by Bob. Bob also pays the cost of health insurance
and group-term life insurance for Donna. Donna is an employee of Bob Blue.
Statutory Employees
If workers are independent contractors under the common law rules, such
workers may nevertheless be treated as employees by statute ( statutory employees
) for certain employment tax purposes if they fall within any one of the following
four categories and meet the three conditions described under Social security
and Medicare taxes , below.
- A driver who distributes beverages (other than milk) or meat, vegetable, fruit,
or bakery products; or who picks up and delivers laundry or dry cleaning, if the
driver is your agent or is paid on commission.
- A full-time life insurance sales agent whose principal business activity is selling
life insurance or annuity contracts, or both, primarily for one life insurance company.
- An individual who works at home on materials or goods that you supply and that must
be returned to you or to a person you name, if you also furnish specifications for
the work to be done.
- A full-time traveling or city salesperson who works on your behalf and turns in
orders to you from wholesalers, retailers, contractors, or operators of hotels,
restaurants, or other similar establishments. The goods sold must be merchandise
for resale or supplies for use in the buyer s business operation. The work performed
for you must be the salesperson s principal business activity. Refer to the
Salesperson section located in Publication 15-A, Employer
s Supplemental Tax Guide for additional information.
Statutory Nonemployees
There are two categories of statutory nonemployees: direct sellers
and licensed real estate agents. They are treated as self-employed
for all Federal tax purposes, including income and employment taxes, if:
- Substantially all payments for their services as direct sellers or real estate agents
are directly related to sales or other output, rather than to the number of hours
worked and
- Their services are performed under a written contract providing that they will not
be treated as employees for Federal tax purposes.
Refer to information on Direct Sellers located in Publication 15-A,
Employer s Supplemental Tax Guide for additional information.
Misclassification of Employees
Consequences of treating an employee as an independent contractor.
If you classify an employee as an independent contractor and you have no reasonable
basis for doing so, you may be held liable for employment taxes for that worker.
See Internal Revenue Code section 3509 for additional information.