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So here’s a question. Employee or independent contractor? What’s the difference?

The short answer is – whoever controls the work. The general rule to follow is if the employer (that the individual is providing services for) has the right to control or direct only the result of the work, and not the means and methods of accomplishing the result, the worker is an independent contractor. If the employer is able to control what will be done, and how it will be done, the individual who is providing the service is considered an employee.

However, it’s not as simple as it used to be and the penalties for misclassifying workers can be steep It’s important to follow the guidelines of the IRS and Unemployment Insurance Commission (UIC) when choosing how to classify a worker. You can use the IRS 20 Factor Test on Employment Status to determine whether the worker is an employee or independent contractor. Special rules apply when dealing with government workers, which can create exceptions to general rules for income tax, social security and Medicare tax withholding.

Misclassifying a worker can result in:

• Back pay in taxes and penalties
• Loss of contracts with government contractors
• Paying unemployment that you didn’t “pre-pay”
• Back pay of worker’s benefits

One option for an employer is to use a local temp service. They are typically responsible for the personnel functions and the associated employment taxes and benefits related to the worker. This is an alternative for an employer who would like to avoid adding an independent contractor to their payroll system.

Know the rules and risks of classifying workers – one wrong step could cost you!