Independent Contractor / Employee Classification

Withholding of income and employment taxes by an employer is required on each of an employee’s wage payments. Generally, the term “wages” includes all remuneration for services performed by an employee for an employer, including the cash value of all remuneration paid in any medium other than cash. The term “employee” must be distinguished from an “independent contractor” for purposes of employment tax obligations. An employer does not generally have to withhold taxes on payments to independent contractors.

The treatment of a worker as an independent contractor or an employee originates from the legal definition developed in the law of agency, whether one party, the principal, is legally responsible for the acts or omissions of another party, the agent, and depends on the principal’s right to direct and control the agent. Employment tax regulations provide that an employer-employee relationship exists when the business for which the services are performed has the right to direct and control the worker who performs the services. This control refers not only to the result to be accomplished by the work, but also the means and details by which that result is accomplished. In other words, a worker is subject to the will and control of the business not only as to what work shall be done but also how it shall be done. It is not necessary that the business actually direct or control the manner in which the services are performed; it is sufficient if the business has the right to do so.

To determine whether the control test is satisfied in a particular case, the facts and circumstances must be examined. Questions about the relationship between the worker and the business are asked to ascertain the degree of control. Over the years, the Internal Revenue Service and the Social Security Administration have compiled a list of 20 factors used in court decisions to determine worker status. These 20 factors are sometimes called the 20 Factor Test. The 20 Factor Test is an analytical tool and not a legal test used for determining worker status. The legal test is whether the principal has the right to direct and control the means and details of work.