Are you really a contractor?

Written by Briana Cavanaugh

July 18, 2011

There’s a set of questions that I get frequently: Am I/Is this person a contractor or an employee? (Or some version of, “do I have to pay payroll taxes for…”)

The IRS has information about this here. It has all kinds of information and audio about employment and tax law much of it actually understandable by normal humans.

And there’s another list in this .pdf file. The big deal is does this person have the right to direct and control the way he or she works, both as to the final result and as to the details of when, where, how, and in which sequence the work is to be done. In California the Employment Development Department or EDD will ask questions like:

*Did you have first call on this person’s time? (ie did you set their schedule)
*Could they work remotely? Or have their own computer/supplies/etc?
*Do you have to perform the services yourself?
*How long did this person work for you? (The longer it is, especially past 6 months, the less likely to be a contractor.)

You can call EDD or the IRS to get a determination. Both organizations will answer your questions and the iRS folks are pretty helpful.

There’s also been a trend to try to classify people as employees as much a possible so that they IRS gets paid. So if you have contractors – people who work for you for whom you are not paying payroll taxes – make sure to follow the rules. There are some places where the IRS rules are unclear, but this is not that place. And with EDD, at least in California, if they decide to audit this piece of your business, they can audit your employment history for everyone you’ve paid back to the first time this person worked for you.

That’s a pretty hefty load of paperwork if nothing else and the penalties frequently cause small and medium sized businesses to go under. So do your research to make sure you’re doing the right thing. Most small businesses I’ve seen tend to pay their people as contractors which is typically wrong especially for administrative support or people who have work on-site and to whom you give instructions.

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