“Employee vs subcontractor – Why the Federal rules are more important to know”
Previously, we explored New Hampshire’s rules for differentiating between an employee and a subcontractor.
As important as it is to know the state rules, oftentimes the bigger stick comes from the Federal government, since if the IRS were to challenge your decision to treat someone as a subcontractor, and successfully argue that he or she should be an employee, you could be looking at payroll taxes and penalties that could easily run up to as much one half of what you were paying that person to begin with!
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. These fall into 3 categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- 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.)
- 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?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another. [ . . . . ]