Do You Know the Difference Between an Employee and an Independent Contractor in Business and at Work?
It’s W-2 (Annual Employee Tax Statement) and 1099 (Annual Independent Contractor Tax Statement) season. I’ve been emailing signed W-9 forms to newer clients so they can get their 1099 forms out on time. It’s a topic I covered once again last week for MWBE business owners participating in the NYC Construction Mentorship Program at their HR / Recruiting Workshop.
The State of New York is crystal clear and very specific about what constitutes a Independent Contractor. This definition, found on their website, is designed to discourage employers from arbitrarily designating an individual as an Independent Contractor, especially when the individual tells you that they would prefer to be a 1099 vendor rather than a W-2 employee. State and Federal DOL (as well as state Tax and Finance and the IRS) tend to frown upon the avoidance of paying unemployment and payroll taxes by either the employee or the employer. Below are New York’s definitions of Independent Contractor and Employee, respectively:
It is vital that you understand the distinction between independent contractors and employees. This affects you and your business.
You may genuinely believe that you have hired people to perform services for you as independent contractors. You may discover that by law they are considered employees and that you are liable for unemployment insurance contributions and interest. (Emphasis mine.)
Whether the relationship is one of employer-employee will depend on several factors. These include how much supervision, direction and control you have over the services.
The Independent Contractor Relationship
Independent contractors are free from:
- Direction and
- Control in the performance of their duties.
They are in business for themselves, offering their services to the general public.
Signs of independent contractor status include a person who:
- Has an established business
- Advertises in the electronic and/or print media
- Buys an ad in the Yellow Pages
- Uses business cards, stationery and billheads
- Carries insurance
- Keeps a place of business and invests in facilities, equipment, and supplies
- Pays their own expenses
- Assumes risk for profit or loss
- Sets their own schedule
- Sets or negotiates their own pay rate
- Offers services to other businesses (competitive or non-competitive)
- Is free to refuse work offers
- May choose to hire help.
In other words: an Independent Contractor has an established business. For example, my business, Deb Best Practices, fits every NYS DOL definition criterion for an Independent Contractor.
The Employer-Employee Relationship
The courts have found that no single factor or group of factors conclusively define an employer-employee relationship. Rather, all factors are reviewed to determine the degree of supervision, direction and control exercised over the services. Generally, an employer controls what will be done, i.e. the manner, means, and results.
An employer-employee relationship may exist if you:
- Choose when, where, and how they perform services
- Provide facilities, equipment, tools and supplies
- Directly supervise the services
- Set the hours of work
- Require exclusive services (An individual cannot work for your competitors while working for you.)
- Set the rate of pay
- Require attendance at meetings and/or training sessions
- Ask for oral or written reports
- Reserve the right to review and approve the work product
- Evaluate job performance
- Require prior permission for absences
- Have the right to hire and fire.
In order to minimize compliance exposure to your organization (and consequently save thousands of dollars in interest, back pay, fees, taxes and fines): do you know the difference between an Independent Contractor and an Employee, in business and at work?