Is your worker an employee or contract labor? Answering this question incorrectly could cost you dollars!
In recent years, the Internal Revenue Service (IRS) and state tax agencies have increased their efforts to find misclassified workers. To help explain how misclassified workers could impact your farming operation, here's an overview of "employees" versus "independent contractor" classifications and filing requirements for each.
Factors to understand
Rich Baumann and Wayne Schoper
IRS and Social Security administrators have compiled a list of 20 factors used in the past to determine a worker's status. However, the basis for these factors and determining a worker's classification (employee versus independent contractor) are:
Behavioral control: Behavioral control refers to facts that show whether the operator has a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. In general, if the operator gives instructions of "how" the job is to be done versus the "end result," the person is an employee. Types of instructions the operator may give an employee include when and where to do the work and what tools or equipment to use.
Financial control: This refers to the extent to which the business has control economically or financially over the worker's duties. Considerations include significant investment, unreimbursed expenses, opportunity for profit or loss and how the worker is compensated (hourly or per job).
Type of relationship: This considers the characteristics of the producer-worker relationship. Considerations include the availability of employee benefits, worker contract and length of employment.
Based on the factors and circumstance of these three characteristics, workers are either classified as an employee or contract labor.
A worker is an employee if:
A worker is an independent contractor if:
The worker typically works independent of operator control
The worker provides their own training to complete the job
The possible penalties
Incorrectly classifying a worker as an independent contractor may make you liable for:
Employment tax liabilities and penalties
Possible insurance liabilities
Worker compensation. Worker compensation is administered on a state-by-state basis, so your liability will depend on state law. Know how your state laws affect you. If your independent contractor is reclassified as an employee, you may be liable for any injuries.
Unemployment issues. Unemployment benefits (FUTA and SUTA) are only paid on employees. Only employees can collect if their position is terminated. Note: This usually becomes an issue when a worker who's been treated as an independent contractor applies for unemployment claiming to be an employee. If there's a question of the worker's true status, the agency will likely review your business practices.
Get official determination
If you're not sure how your workers should be classified, you can ask the IRS to make a determination by filing a Form SS-8, "Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding." However, it can take up to six months to receive an "official" determination. This form is available to both workers and employers.
For more information on this subject, see these references:
Independent Contractor or Employee (www.irs.gov /pub/irs-pdf/pI779.pdf)
Employee vs. Independent Contractor - Seven Tips for Business Owners (www.irs.gov/newsroom/article /O,,id=173423,OO.htmI)
IRS Publication 1779: Independent Contractor (Self-Employed) or Employee (www.irs.gov/businesses/small/article/O,,id=99921,OO.htmI)
Publication 15-A, Employer's Supplemental Tax Guide, Supplement to Publication 15 (www.irs.gov/pub/irs-pdf /pI5a.pdf)