Reader Writes -> Hi Tom: During our busy season we call in people to help in production. These folks may work three to forty hours depending on our needs. I resist adding them to payroll; rather I pay them as contract labor, providing a 1099 at year’s end. But I have too many in this category according to my accountant. We have been advised to add some of these people as part time employees.
Tom replies -> Hum, problem here is YOU don’t get to choose whether the worker is contract labor or an employee and it sounds like they are employees to me. Specifically, what matters is whether you have the legal right to control the details of how the work is performed and it sounds to me like you do. Nevertheless, every situation is considered on the facts of the relationship. However, there are guidelines that will be useful to you. Here’s the lowdown….
Main issue: the Internal Revenue wants the worker to be someone’s employee so that proper payroll and social security taxes are paid. When you treat a worker as contract labor or an independent contractor, no taxes are withheld and it’s not common for them to be voluntarily paid by the worker either. That’s the rub.
There have been many court cases over the years establishing what an employee is. Today I can say with certainty that if they are working in your premises, on your equipment, at your direction and/or during the hours you set and/or you are paying them by the hour, then the worker is an employee. The following 20 Factor Test is commonly cited as a guideline, however the circumstances of each specific case rule. Nevertheless, these factors give you a good idea as to whether a worker is an employee:
1. If the workers are required to comply with your instructions about when, where and how they are to work, then the worker is an employee.
2. If the worker is trained by experienced employee(s) and required to attend meetings, then the worker is an employee.
3. If the workers’ services are integrated into your business operation (rarely would a press operator, for instance, be considered an independent contractor), then the worker is an employee.
4. If the worker is required by you to render their services personally (you expect your typesetter – -a specific person – - to do the work as opposed to any number of people actually setting the type in a service bureau), then the worker is an employee.
5. If you set the hours to perform the work (such as between 8 and 5), then the worker is an employee.
6. If you tell a full time worker how much time they must spend working (as opposed to an independent contractor taking as many breaks as they choose) and if they are told whether or not they can do other work (such as you not allowing them to do work for your closest competitor), then that would make them an employee.
7. If the worker performs the work on your premises and you pay the person for the work, then the worker is probably an employee.
8. If you control the order in which the services are performed (such as the decision over which job will be done and in what order), then the worker is probably an employee. (An independent service bureau responds to your demands as it does any customer’s demands. If you have the absolute ability to order your job to be done in preference to some other customer’s job, then the worker is probably an employee.)
9. If your worker submits regular or written reports to you, then the worker is an employee.
10. If the worker is paid by the hour, week or month, then the worker is an employee.
11. If the worker receives payment for their business and traveling expenses, then the worker is an employee.
12. If the worker is furnished with tools, materials and other equipment, then the worker is an employee.
13. If the worker can quit without incurring any liability (such as the typesetter having an actual lease on space and equipment within your facility and having to honor that lease whether or not they choose to continue to do work for you), then the worker is probably an employee.
14. If the worker can be fired by you, then the worker is an employee.
15. If the worker has a continuing relationship with the person hiring them, then the worker is probably an employee.
16. However, if the worker pays for their own facilities used in performing their services, then the worker is probably an independent contractor.
17. If the worker can realize a profit and loss, then the worker is probably an independent contractor.
18. If the worker performs services for multiple unrelated firms at the same time, then the worker is probably an independent contractor.
19. If the worker makes their services available to the general public, then the worker is probably an independent contractor.
20. Finally, if you hire, supervise and pays assistants, then it is considered that you control the workers on the job, and therefore, those workers are ordinarily considered employees.
Yea, But What If They Work For A Temporary Agency?
A temp agency employers workers (and pays employment taxes, etc.) on the worker and supplies workers to you so they are on someone’s payroll which is what the Internal Revenue is most interested in. However, note that the temp agency assigns the workers and can send you whomever so they have been held to be the employer of record. It could get sticky here but remember the big deal to the IRS is the collection of payroll taxes. So, since that’s being done through the temporary agency, there is much less likelihood of contract labor being an issue.
What About Employee Leasing?
Generally this is a co-employment arrangement which could present you some problems if you paid the leasing company and they failed to pay the worker, but that’s rare. Again, what’s important is that the worker is an employee of the leasing company and that’s where the payroll taxes are paid so you are unlikely to get into trouble here.