Owners of construction businesses should know the rules when it comes to classifying a worker as an employee or an independent contractor, since each of these worker classifications has different tax liabilities and tax withholding and payment procedures. Employers who fail to comply with IRS rules can face consequences, including having to pay back taxes and benefits, as well as penalties.
Generally, an independent contractor is any worker hired to deliver a specific result, and determines how to achieve that result on his or her own terms, while an employee is a worker who completes the tasks assigned to him or her in the time frame and manner specified by the employer. While employers must withhold income taxes and pay Social Security, Medicare taxes, and unemployment tax on wages paid to an employee, they normally do not have to withhold or pay any taxes on payments to independent contractors.
According to the IRS, there are two main criteria business owners should keep in mind when classifying workers: control and relationship.
The level of control can be measured by factors such as whether the worker has invested in the facilities and equipment used in performing services, whether the worker makes his or her services available to the open market, how the worker is paid by the business, and whether the worker has the opportunity to make profits or losses.
Worker status is also determined by the relationship between the employer and the worker. Key factors to consider are whether the business provides the worker with employee benefits, whether the relationship is permanent, whether the services performed by the worker are integral to the regular business of the company, and whether the worker has unreimbursed business expenses.
Employers who are uncertain of how certain workers should be classified can use Form SS-8 to request a determination from the IRS.