Are your workers W-2 employees, thereby requiring you to pay payroll taxes, or are they 1099 independent contractors?
The IRS has a long checklist of questions to help you answer this. Here’s a shorter one to get you started. If it’s a close call, go to the IRS. But most people really know the answer to this question in their heart of hearts. Here are our questions:
1. Does some other employer treat your worker as an employee?
If you bring in consultants or temporary workers who are employed by another firm that treats these people as its own W-2 employees, they’re not yours (unless this is going on for a long time and they’re not really working for the other firm). This rule also covers folks who might come in to paint the place or install computers for you.
2. Is your worker full time?
Most full-time workers are W-2 employees. By full-time we also mean someone who is working for you for months and years. You might have an independent contractor who works full-time for only a week (and we’re not talking about someone you intended to hire indefinitely but didn’t work out).
3. Does your worker have his or her own business?
Independent business people sometimes look like employees. How can you tell the difference? A business generally promises you a job done and then does it with its own equipment, often on its own premises, and in its own way. Your concern is just with the end product. This issue is often very fuzzy. But sometimes you can tell if your worker is offering (and performing) similar services to clients other than yourself at the same time. Independent businesses try to have more than a single customer. Sometimes it comes down to the written contract you have with the person.
The IRS considers this issue to be a problem in some specific industries. You can find this information in IRS audit training guides if one has been written for your business. It will tell you what the IRS would look for in your case.
