As a business owner you will likely get to the point where you need to hire some help. Face it, we can’t do everything on our own. Whether you want to hire a true employee or an independent contractor matters. It is something that creates very different tax consequences for you and the business. That is a decision that you, and possibly your CPA will need to make. And once you decide what type of person you want to hire, you will want to get a great independent contractor or employee agreement in place.
So what makes someone an independent contractor rather than an employee? Well for starters, that agreement I just referenced. But that’s not all.
What is an independent contractor??
The general definition used by the IRS and multiple states is “independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer (employer) has the right to control or direct only the result of the work and not what will be done and how it will be done.”
In the fitness industry we see independent contractors used a lot for personal training/fitness instructors. They can be seen in other scenarios too, such as graphic designers, or various manufacturers for say, your clothing line.
Often times people assume that if you hire someone to do work for you, and they already own their own business they are automatically an independent contractor for your purposes. But that just isn’t true.
What factors go into determining someone’s status?
First, note that each state and federal agency will have different lists and factors that are considered. It is important to keep in mind that these types of cases are VERY case specific and they are going to look at the totality of the circumstances. But in general, these are some factors you can test to see if the person working for you is an employee or an Independent contractor.
The main thing to remember is the level of control you as the employer has over the worker, or potential employee.
According to the IRS three of the main factors they look at include the following:
Behavioral: Does your company or business control or have the right to control what this person does and how the person or worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the you? (these include things like how worker is paid, who provides tools/supplies for the job itself, if expenses are reimbursed, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship be continuous or is there a specified end date? Also, is the work performed a key aspect of your business or just something simple you might hire someone to handle once?
Another great place to reference is the FLSA’s website and their test in determining if someone working for you is a true independent contractor. This page is great and offers some very in depth questions for you to consider in deciding how you handle the relationship between your business and those you are hiring to work with you.
Keep in mind there is no magic number of factors, or anything that is a concrete yes or no. The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used by the different governing bodies. This will help you determine if you’re creating an independent contractor or employee type relationship.
Now that you have an idea of some of the ways you can decide if you are hiring an independent contractor, the next step you will want to take would be to put that in WRITING with the person. You will have a contract with that worker establishing your relationship as employer and independent contractor, and it will cover ALL of the above things so that it is clear from the beginning the type of relationship you are going to have.
If you have questions regarding how to put together an independent contractor agreement or an employee agreement contact us through the contact tab on our website! We would love to chat!
Please note that this is not meant to be legal advice for you or your situation, this is merely some legal research and knowledge regarding various factors in an employee/independent contractor situation.