Contractor or employee?

Contractor or employee? - McGrath, LLCContractors are often a popular option for employers, especially small businesses, because they do not come with the expense that traditional employees do. Typically, business owners do not have to withhold income taxes or pay Social Security, Medicare, and unemployment taxes on wages paid to a contractor, unlike an employee.

If your business employs contractors, you may want to confirm that the contractors are, in fact, contractors. Even if both you and the contractor you hired are in agreement about his or her work status, the IRS may not see it that way. Over the past few years, the IRS and the Department of Labor have been cracking down on businesses that misclassify workers, auditing businesses closely and demanding back taxes.

In order to protect your business from the potential ramifications of mislabeling your employees as contractors, you should consider the following issues provided by a recent article on

Do you control the contractor’s work?

A “contractor” has to be independent. “If you control how, when, and where your contractor does his work, chances are this is not a contractor,” stated the article. Although you can, of course, set certain deadlines on the work, aspects of the job such as the length of lunch breaks should be controlled by the contractor.

Does the contractor own their supplies—or do you? 

This is a flexible rule: if you hire a contractor to fix your office’s wiring, obviously he or she will be working on the wiring. However, if the contractor that is doing your repair work is driving the company truck or using tools you own, the IRS may view that worker as a “common-law employee,” eligible for the same benefits as a regular employee.

In which industry does your business operate?

Certain industries are audited by the IRS more frequently than others. The most commonly audited industries include drywall, landscaping, restaurants, security, and cleaning companies. While operating in this industry doesn’t guarantee that you’ll be facing an audit soon or that you’ve violated any laws, it does mean that you should tread more carefully: expect to be reviewed eventually and confirm that you are compliant with all applicable employment laws.

Is your “contractor” being treated as an employee?

If you provide health insurance or have no contract in writing regarding their work, the contractor could be considered an employee by the IRS. Contractors, unlike employees, are typically under contract, with provisions for when the work starts and ends. In addition, the IRS states that the contractor could be an employee if the work he or she does is a “key aspect” of your business.

Does your contractor have other jobs and clients?

If your contractors work for your business—and only your business—you may not be able to label them as contractors.

To make sure that your business is in compliance with IRS, check the IRS rules regarding the classification of workers or consult with a business law attorney.

About Chris McGrath

I'm a Carmel, Indiana business attorney providing business counsel, commercial litigation and mediation services based on over 20 years of experience. My firm is founded on a principle of supporting others' advancement and achievement, and my core values are service, passion, faith & loyalty.Chris McGrath's Google+ Profile