The Internal Revenue Service (IRS) places significant weight on the differences between an employee versus an independent contractor. According to the IRS, worker classification is critical because it determines how the employer pays an employee or independent contractor. Although a business could hire either an employee or an independent contractor for the same job, the company is legally obligated to set up its payments differently between the two. Businesses withhold income tax, Social Security, and Medicare from their employees’ wages. On the contrary, employment and labor laws do not apply to independent contractors, so businesses will not withhold the same taxes as they do for their employees.
There are a few factors to consider if a worker is an employee or independent contractor. Further, each state has tests to help determine a worker’s status under employment and labor laws. North Carolina’s Department of Labor provides state-specific regulations and rights to protect NC residents. In general, the independence of a worker is based upon three entities: behavior control, financial control, and type of relationship.
1. Behavioral Control
Behavioral control refers to the degree of control businesses and employers have over their workers. For example, do the employers give detailed directions, such as a time and place where the workers are to perform their job? Other details that an employer may or may not control include the tools used on the job, the places to purchase the capital resources, and the training of the workers. The more oversight the employer has, the more likely a worker is an employee rather than an independent contractor.
2. Financial Control
Like behavioral control, the business’ right to control the worker’s financial and business aspects of their job determines whether the worker is an employee or independent contractor. For instance, if a company’s headquarters hire a plumber for a specific, one-time job, they cannot dictate what equipment the plumber invests in to complete the job. The plumber’s payment will be a one-time flat fee as an independent contractor. On the other hand, if that company hires a team of custodians to keep on-site for general cleaning, they would be guaranteed a regular wage and use the equipment given to them by their employer as the employees. The financial factor includes how the worker is paid, if they can seek work elsewhere at the same time as the original job, and control over investment resources to carry out the job.
3. Type of Relationship
The final factor to take into account is the type of relationship the worker has with the business. Companies typically provide employee benefits such as insurance, pension plans, and vacation and sick days to their employees. An independent contractor, in most circumstances, does not receive these benefits. The permanency of a job will also reflect the relationship of a worker to a business. An employee will generally continue indefinitely, whereas an independent contractor is hired for a specific project or period.
Conclusion
Since classifying a worker as an independent contractor or employee heavily changes their payment and taxes according to governing laws, it is important to correctly understand the differences between them. Recognizing the three overarching factors that determine one position from the other will help businesses stay compliant. When in doubt, it is a good idea to contact a business or franchise attorney to discuss how to best proceed.
DYE CULIK PC is a Charlotte, North Carolina small business and franchise law firm. Our attorneys represent small businesses for everything from starting a business, employment and contractor matters, and disputes and litigation with competitors, employees, and customers. Give us a call at 980-999-3557 if you need help or legal advice for your small business. Follow us on Instagram for the latest updates on CLT small businesses.