Employers must correctly classify workers as either freelance contractors or employees, using the Department of Labor's economic reality test and IRS criteria.
In today's business environment, some offices and businesses use freelance contract workers who work independently to fill an immediate and temporary need for additional workforce. Others hire placement agencies to provide them with temporary workers to fill a sudden vacancy.
Federal and tax laws require employers to determine whether a worker is a freelance contract worker or an employee. The Department of Labor uses an “economic reality test” to determine how a worker is classified. The Internal Revenue Service, on the other hand, uses a “20-step statutory test.”
- The economic reality test used by the Department of Labor relies on five factors:
- The extent to which the services rendered become an essential part of running the employer's business
- The permanence of the business relationship
- The amount the worker spends on facilities and equipment
- The worker's opportunity for profit and loss
- The initiative, foresight, and/or judgment the worker exercises while performing his or her services
- The IRS has a different set of criteria for determining how to classify a worker. It examines the following to evaluate the relationship between the employer and the worker:
- Behavioral control - whether the employer has the right to control and direct, through training and instructions, how the worker performs the task he was hired to do
- Financial control - how the employer controls or directs the business aspects of the worker's activities, such as method of payment, unreimbursed expenses, investment, and opportunities for profit and loss
- Relationship of the parties - the existence of written contracts, payment of employee benefits, and discharge/termination
- The IRS also examines circumstances in which a contractor can be classified as an employee:
- Freelance contractors invest their time and money without any guarantee of success on the task they were hired to do. However, when a worker is restricted in the amount he can gain from performing his job and is protected from loss, he is an employee.
- A worker is classified as an employee when he is hired for an indefinite period; this classification also applies to work or service performed irregularly but recurring, as well as seasonal, temporary, and part-time jobs.
- Complying with another person's instructions on how, when, and where to perform a job makes a worker an employee.
- If a worker is required to be trained by another employee, to correspond with the employer, and to attend training courses and sessions, he is classified as an employee.
- Personally rendering the service in question makes the hired worker an employee.
- Other indicators that suggest an employee classification include: when the worker's services and tasks contribute to the success of the employer's business; when assistants are hired for the worker; when set hours of work and full-time work are required; when the worker works on the employer's premises even if the work could be done elsewhere; and when the worker is required to work in a sequence or set order.
- A worker who is required to submit reports; who is paid by the hour, week, or month; who has travel and business expenses paid; and who is provided with a set of tools and equipment to perform his tasks is classified as an employee. If he can be terminated or discharged from the job, then he is an employee.
- A freelance contractor, on the other hand, is one who uses his own finances to complete the task he was hired to do, contracts with other firms, and is available to the general public.
It is vital that you, as the business owner, correctly determine whether the person you hire is going to be your permanent employee or technically a freelance contractor. This classification is the basis for payments as well as the withholding of income taxes, Medicare, Social Security, and other allowed employee deductions.
Classify a Contract Worker
Employers must correctly classify workers as either freelance contractors or employees, using the Department of Labor's economic reality test and IRS criteria.
In today's business environment, some offices and businesses use freelance contract workers who work independently to fill an immediate and temporary need for additional workforce. Others hire placement agencies to provide them with temporary workers to fill a sudden vacancy.
Federal and tax laws require employers to determine whether a worker is a freelance contract worker or an employee. The Department of Labor uses an “economic reality test” to determine how a worker is classified. The Internal Revenue Service, on the other hand, uses a “20-step statutory test.”
- The economic reality test used by the Department of Labor relies on five factors:
- The extent to which the services rendered become an essential part of running the employer's business
- The permanence of the business relationship
- The amount the worker spends on facilities and equipment
- The worker's opportunity for profit and loss
- The initiative, foresight, and/or judgment the worker exercises while performing his or her services
- The IRS has a different set of criteria for determining how to classify a worker. It examines the following to evaluate the relationship between the employer and the worker:
- Behavioral control - whether the employer has the right to control and direct, through training and instructions, how the worker performs the task he was hired to do
- Financial control - how the employer controls or directs the business aspects of the worker's activities, such as method of payment, unreimbursed expenses, investment, and opportunities for profit and loss
- Relationship of the parties - the existence of written contracts, payment of employee benefits, and discharge/termination
- The IRS also examines circumstances in which a contractor can be classified as an employee:
- Freelance contractors invest their time and money without any guarantee of success on the task they were hired to do. However, when a worker is restricted in the amount he can gain from performing his job and is protected from loss, he is an employee.
- A worker is classified as an employee when he is hired for an indefinite period; this classification also applies to work or service performed irregularly but recurring, as well as seasonal, temporary, and part-time jobs.
- Complying with another person's instructions on how, when, and where to perform a job makes a worker an employee.
- If a worker is required to be trained by another employee, to correspond with the employer, and to attend training courses and sessions, he is classified as an employee.
- Personally rendering the service in question makes the hired worker an employee.
- Other indicators that suggest an employee classification include: when the worker's services and tasks contribute to the success of the employer's business; when assistants are hired for the worker; when set hours of work and full-time work are required; when the worker works on the employer's premises even if the work could be done elsewhere; and when the worker is required to work in a sequence or set order.
- A worker who is required to submit reports; who is paid by the hour, week, or month; who has travel and business expenses paid; and who is provided with a set of tools and equipment to perform his tasks is classified as an employee. If he can be terminated or discharged from the job, then he is an employee.
- A freelance contractor, on the other hand, is one who uses his own finances to complete the task he was hired to do, contracts with other firms, and is available to the general public.
It is vital that you, as the business owner, correctly determine whether the person you hire is going to be your permanent employee or technically a freelance contractor. This classification is the basis for payments as well as the withholding of income taxes, Medicare, Social Security, and other allowed employee deductions.
Classify a Contract Worker
By Howtodotips
Employers must correctly classify workers as either freelance contractors or employees, using the Department of Labor's economic reality test and IRS criteria.