Employee or Contractor?

An employer must generally withhold income taxes, withhold and pay social security and Medicare taxes, and pay unemployment tax on wages paid to an employee. An employer does not generally have to withhold or pay any taxes on payments to independent contractors.

Which are you?

For federal tax purposes, this is an important distinction.  Work classification affects how you pay your federal income tax, social security and Medicare taxes.  Classification affects your eligibility for employer and social security and Medicare benefits and your tax responsibilities. 

The courts have considered many facts in deciding whether a worker is an independent contractor or an employee.  These relevant facts fall into three main categories:  behavioral control; financial control and relationship of the parties.  In each case, it is very important to consider all the facts – no single fact provides the answer.  Carefully review the following definitions.

Behavioral Control

These facts show whether there is a right to direct and control how the worker does the work.  A worker is an employee when the business has the right to direct and control the worker.  The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.  For example:

Instructions the business gives the worker. An employee is generally subject to the business' instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work:

The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right.

Training the business gives the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.

Financial Control

These facts show whether there is a right to direct or control the business part of the work.  For example: 

Significant investment – if you have a significant investment in your work, you may be an independent contractor.  While there is no precise dollar test, the investment must have substance.  However, a significant investment is not necessary to be an independent contractor.

How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.

The extent to which the worker can realize a profit or loss. An independent contractor can make a profit or loss.

Relationship of the Parties

Type of relationship.  Facts that show the parties' type of relationship include:

Written contracts describing the relationship the parties intended to create.

Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.

The permanency of the relationship. If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship.

The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney's work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

When You Are an Employee

Your employer must withhold income tax and your portion of social security and Medicare taxes.  Also, your employer is responsible for paying social security, Medicare and unemployment (FUTA) taxes on your wages.  Your employer must give you a Form W-2, Wage and tax Statement, showing the amount of taxes withheld from your pay.

You may deduct unreimbursed employee business expenses on Schedule A of your income tax return, but only if you itemize deductions and they total more than two percent of your adjusted gross income.

When You Are an Independent Contractor

The business may be required to give you Form 1099 – MISC, Miscellaneous Income, to report what it has paid to you.

You are responsible for paying your own income tax and self-employment tax (Self-Employment Contributions Act – SECA).  The business does not withhold taxes from your pay.  You may need to make estimated tax payments during the year to cover your tax liabilities.  

You may deduct business expenses on Schedule C of your income tax return.

Form W-9

The IRS requires that all businesses that pay for contract services must have a current W-9 on file for each contract service provider.  When a requisition is turned in to request payment for a contracted service it must a W-9 Form.  You can pull up a W-9 Fill in Form at: www.irs.gov/pub/irs-fill/fw9.pdf or on the Business Website under Business Forms.

Letter of Agreement for Contracted Services 

There needs to be a legal binding contract filled out with signatures between the business and those that they are contracting with to perform the service.  If the business does not provide a standard contract, then the PISD Letter of Agreement may by used. The Board has authorized, the Associate Superintendent of Finance and the Purchasing Agent to sign contracts on behalf of the district.      

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Last modified: 07/12/07