Contractor Identification Criteria
Effective Date 11/1/14
Each State Agency, Board and Commission has the responsibility to make the initial determination. However, the determination will usually be reviewed by the State Social Security Administrator, i.e.: State Accounting Administrator.
The Resources Section of this document is linked directly to some of the forms and discussion documents used to make this determination. Form SS-8 is the form used in the determination process.
The following is taken from the Internal Revenue Service Employer's Supplemental Tax Guide, Pub 15-A to assist you in the decision making process.
Employee vs. Independent Contractors
The tax law covering independent contractors is complicated. Before you can determine how to treat payments made for services, you must first know the business relationship that exists between the State and the person performing the services. The person performing the services may be:
- An independent contractor
- A common-law employee (Employee)
- A statutory employee
- A statutory nonemployee
It is critical that you, the employer, correctly determine whether the individuals providing services are employees or independent contractors. In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. An employer must generally withhold federal income taxes, withhold and pay over 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 over any federal taxes on payments to independent contractors.
Caution: If you incorrectly classify an employee as an independent contractor, the State can be held liable for employment taxes for that worker, plus a penalties.
Items to Consider When Determining if an Employee or Contractor Relationship Exists:
An employee is generally subject to the business' instructions about when, where, and how to work. The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavior control may exist if the employer has the right to control how the work results are achieved.
Financial control. Facts that show whether the business has a right to control the business aspects of the worker's job include the extent:
- the worker has unreimbursed business expense;
- of the workers investment;
- the worker makes their services available to the relevant market; and
- how the worker is paid.
Example: Steve Smith, a computer programmer, is laid off when Megabyte Inc. downsizes. Megabyte agrees to pay Steve a flat amount to complete a one-time project to create a certain product. It is not clear how long it will take to complete the project, and Steve is not guaranteed any minimum payment for the hours spent on the program. Megabyte provides Steve with no instructions beyond the specification for the product itself. Steve and Megabyte have a written contract, which provides that Steve is considered to be an independent contractor, is required to pay Federal and state taxes, and receives no benefits from Megabyte. Megabyte will file a Form 1099-Misc. Steve does the work on a new high-end computer which cost him $7000. Steve works at home and is not expected or allowed to attend meetings of the software development group. Steve is an independent contractor.
Refer to the page on Paying Independent Contractor if you need information on what your responsibilities are when paying contractors.
Who is a Common-Law Employee?
Under common-law rules, anyone who performs services for you is your employee is you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
To determine whether an individual is an employee or independent contractor under the common law, the relationship of the worker and the business must be examined. All evidence of control and independence must be considered. In an employee-independent contractor determination, all information that provides evidence of the degree of control and degree of independence must be considered.
Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties. Refer to Publication 15-A, Employer's Supplemental Tax Guide for additional information.
Who is an Employee?
A general rule is that anyone who performs services for you is your employee if you can control what will be done and how it will be done.
Example: Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. She works 6 days a week, and is on duty in Bob's showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager's approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Bob. Bob also pays the cost of health insurance and group-term life insurance for Donna. Donna is an employee of Bob Blue.
If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute (statutory employees) for certain employment tax purposes if they fall within any one of the following four categories and meet the three conditions described under social security and Medicare taxes.
- A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
- A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
- An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.
- A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. The work performed for you must be the salesperson's principal business activity. Refer to the Salesperson section located in Publication 15-A, Employer's Supplemental Tax Guide for additional information.
There are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. Direct sellers and licensed real estate agents are treated as self-employed for all Federal tax purposes, including income and employment taxes, if:
1. Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked and
2. Their services are performed under a written contract providing that they will not be treated as employees for Federal tax purposes.
Refer to information on Direct Sellers and Companion sitters located in Publication 15-A, Employer's Supplemental Tax Guide for additional information.
- Tax Topic 762 Basic Information
To determine whether a worker is an independent contractor or an employee, you must examine the relationship between the worker and the business. All evidence of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories Behavioral Control, Financial Control, and the Type of Relationship itself.
- Publication 1976, Section 530 Employment Tax Relief Requirements (PDF)
Section 530 provides businesses with relief from Federal employment tax obligations if certain requirements are met.
- IRS Internal Training: Employee/Independent Contractor
This manual provides you with the tools to make correct determinations of worker classifications. It discusses facts that may indicate the existence of an independent contractor or an employer-employee relationship. This training manual is a guide and is not legally binding. If you would like the IRS to make the determination of worker status, please file IRS Form SS-8.
- Form SS-8 (PDF)
Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
- Publication 15-A
The Employer's Supplemental Tax Guide has detailed guidance including information for specific industries.
- Publication 15-B
The Employer’s Tax Guide to Fringe Benefits supplements Circular E (Pub. 15), Employer's Tax Guide, and Publication 15-A, Employer's Supplemental Tax Guide. It contains specialized and detailed information on the employment tax treatment of fringe benefits.