Startup CEOs often find themselves in a gray area when it comes to defining a worker as an employee or independent contractor. As it turns out, the definition consists of more factors than whether or not the worker is considered “part-time” or not.
According to the Internal Revenue Service, the criteria on which to base a company’s contract with a worker falls into three categories: behavioral, financial and relationship-type. Asking these questions may help you determine whether he or she is an employee or independent contractor:
If you answered “yes” to these questions, the worker in question is likely being treated as an employee, according to the IRS:
- Who controls where, when and how the worker performs the work?
- Is the worker required to be on premises at certain hours?
- Is the worker financially dependent on a single company for his or her income?
- Who sets the worker’s rate?
Remember, an independent contractor sets his or her own rate and is not financially dependent on any one income source. Unlike an employee, an independent contractor may make a profit.
- Does the worker receive benefits?
- How integral is the worker to the startup?
If your startup provides a worker with benefits and includes the worker in team meetings or other activities, then he or she is being treated as an employee.
In other words, an employee’s role and professional behaviors are dictated by the employer, so the employer takes responsibility for paying certain taxes and must provide certain benefits. Because of this dependent relationship, the government provides certain protections for workers classified as employees.
An independent contractor, on the other hand, controls his or her own schedule, wages, and place of work while providing a specific service to a company for a specific period of time and is responsible for his or her own taxes and expenses.
There are serious consequences for employers who misclassify workers. Among these are overtime penalties, employment taxes, social security taxes and even punitive damages. A company may be audited by the IRS, or a disgruntled employee may file a complaint with the Department of Labor.
Those with questions or concerns about worker classifications should visit www.irs.gov or contact an attorney.
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