California Employment Law: Independent Contractor vs. Employee

How does one differentiate between an “independent contractor” and an “employee”? Can companies and individuals elect to be treated one way or the other?

The IRS identifies three different categories to differentiate whether a person is an employee or an independent contractor.  The first category is behavior: does the company have control on what the worker does or how the worker does his or her job?  Second is financial: are the business aspects of the worker controlled by the payer (how the worker is paid, are supplies reimbursed)?  Lastly, is the type of relationship: are there written contracts or employee type benefits such as pension or vacation pay?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

Individuals designated as independent contractors are issued 1099 tax forms by companies that have compensated them in the previous year for labor/services provided. No taxes are being paid by the company on behalf of the independent contractor. On the other hand, employees of a company receive payments from their employer and the employer is obligated to withhold associated taxes. In addition, employees typically receive W-2 tax forms from their employer for the previous year’s employment.

Things become messy when an individual begins to realize they have been (or believe to have been) misclassified as an independent contractor when they were legally an employee of the company, as defined by legal and tax authority. The individual realizes that he/she is responsible for all the taxes associated with his/her labor/services for the previous year and any additional applicable taxes, such as self-employment tax. This is where the conflict arises and the relationship goes sour.

Companies/employers and employees/independent contractors need to address this designation issue at the outset of the relationship and understand the implications (both legally and from a tax perspective).

Please contact Richardson “Red” Griswold of Griswold Law for more information.

For further reading on this topic, be sure to check out the complete list of employment articles.

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