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Our Clients often ask our lawyers:  is this a contractor, or an employee?  It matters because with an employee, the employer must withhold taxes.  This can make an employee seem more expensive than a contractor, and employers will try to categorize workers as contractors.  This can be a very expensive mistake, because the Internal Revenue Service will penalize the employer harshly, by charging the employer 28% of everything the employer paid the worker, and substantial interest, fines, and penalties.

If this is a question or issue for you, please do not hesitate to call The Fernandez Law Firm, P.C. at 678.678.2402.  We can help you identify this problem, and we can also help you with numerous solutions.

You do not want the first time you address this problem to be when you sit across from an IRS examiner because the results will be brutal, and probably not in your favor.  This would not be the time to learn the difference between an employee and a contractor for the first time.

The Internal Revenue Service (IRS) has its own method of determining whether a worker an employee or contractor. 

At the Fernandez Law Firm, we tell our Clients to think about the employee v. contractor question this way: compare a secretary in your office to a plumber who comes in to fix a broken pipe. 

Typically, your secretary comes to the office at 9 a.m., sits at the employer’s desk, uses the employer’s computer, phone, and software, takes direction from the employer (is “controlled” by the employer), and then at 5 p.m., the secretary leaves for the day.  The secretary is typically paid on a regular schedule.  The secretary works every business day, for months or years.

Contrast this with a plumber that the employer might call because of a broken pipe.  The plumber comes when he can, arrives with his own tools which he has purchased himself, does not take direction from the employer, fixes the pipe, hands an invoice to the employer, and leaves and does not return the next day.

The IRS is primarily looking for three kinds of control: 

·        Behavioral control: Does the employer have the right to control the worker, like the secretary, or does the worker decide how he will do his own job, like the secretary?

·        Financial control:  Does the employer control how the worker is paid, like with a regular paycheck for the secretary, or does the worker control how he will be paid, like with an invoice for the plumber?

·        Type of Relationship:  Is there a written contract, employee benefits like a pension plan, vacation pay?  If so, the worker is more likely to be an employee.  Also, if the relationship continues, and the work is a key aspect of the business, then the worker is more likely to be an employee.  The relationship a plumber has to a software business, for example is that relationship will not be ongoing, and plumbing work has nothing to do with software programming.

The Internal Revenue Service will look at the entire relationship and consider the degree or extent of the right to direct and control the worker.  The IRS also looks at the below factors.  Each case is considered uniquely, but if the worker hits seven or more of these tests as a “yes” — the worker is likely an employee, and the taxes have to be withheld, or there can be large penalties and interest assessed by the IRS and the state department of revenue.

Now, take the test for yourself — and then give us a call to tidy it all up.  The Fernandez Law Firm, (678) 667-2404:

1. InstructionsIs the worker required to comply with employer’s instructions about when, where, and how to work?If the worker needs to be at your office at 9 am, uses your desk, your computer, your software, and clocks out at 5 p.m. and leaves your office, and comes mostly every day, that worker is probably and employee. If the worker comes in like a plumber, with his own truck and tools at any time he wants, once in a while, that worker is probably a contractor.If you check yes, that worker is more likely an employee.
2. TrainingIs training required? Does the worker receive training from or at the direction of the employer, includes attending meetings and working with experienced employees? If the worker has to attend meetings with the rest of your workers, that worker is probably an employee. If the worker comes in like a plumber, with his own truck and tools at any time he wants, that worker is probably a contractor.If you check yes, that worker is more likely an employee.
3. IntegrationAre the worker’s services integrated with activities of the company? Does the success of the employer’s business significantly depend upon the performance of services that the worker provides? If the worker’s work is part of what your business does, that worker is probably an employee. If the worker comes in like a plumber, and goes to your bathroom and fixes a leaky sink, and you are a software development company, that worker is probably a contractor.If you check yes, that worker is more likely an employee.
4. Services Rendered PersonallyIs the worker required to perform the work personally? If the worker’s work is rendered by that specific person, the worker is probably an employee. If anyone from the plumbing company comes in and fixes the leaky sink, that worker is probably a contractor.If you check yes, that worker is more likely an employee.
5. Authority to hire, supervise and pay assistantsDoes the worker have the ability to hire, supervise and pay assistants for the employer? If the worker can hire staff for your business, the worker is probably an employee. The plumber cannot hire workers for your software company.  The plumber is more likely a contractor.If you check yes, that worker is more likely an employee.
6. Continuing RelationshipDoes the worker have a continuing relationship with the employer? If the worker has been working for you for a while, the worker is probably an employee. If the plumber comes once or twice to fix a leaky sink, the plumber is more likely a contractor.If you check yes, that worker is more likely an employee.
7. Set Hours of WorkIs the worker required to follow set hours of work? If the worker needs to be at your office at 9 am, uses your desk, your computer, your software, and clocks out at 5 p.m. and leaves your office, that worker is probably and employee. If the worker comes in like a plumber, with his own truck and tools at any time he wants, once in a while, that worker is probably a contractor.If you check yes, that worker is more likely an employee.
8. Full-time Work RequiredDoes the worker work full-time for the employer? If the worker needs to be at your office at 9 am, uses your desk, your computer, your software, and clocks out at 5 p.m. and leaves your office, that worker is probably and employee. If the worker comes in like a plumber, with his own truck and tools at any time he wants, once in a while, that worker is probably a contractor.If you check yes, that worker is more likely an employee.
9. Place of WorkDoes the worker perform work on the employer’s premises and use the company’s office equipment? If the worker needs to be at your office at 9 am, uses your desk, your computer, your software, and clocks out at 5 p.m. and leaves your office, that worker is probably and employee. If the worker comes in like a plumber, with his own truck and tools at any time he wants, once in a while, and works at a lot of different locations, that worker is probably a contractor.If you check yes, that worker is more likely an employee.
10. Sequence of WorkDoes the worker perform work in a sequence set by the employer? Does the worker follow a set schedule?If you tell the worker which project to do first, or how to do the project, that worker is probably an employee. If the worker comes in like a plumber, and does his work the way he wants to do it, with his own truck and tools at any time he wants, once in a while, and works at a lot of different locations, that worker is probably a contractor.If you check yes, that worker is more likely an employee.
11.  Reporting ObligationsDoes the worker submit regular written or oral reports to the employer? If the worker has to tell you how and when he did his work, that worker is probably an employee. If the worker comes in like a plumber, and does his work the way he wants to do it, does not submit any kind of written reports, with his own truck and tools at any time he wants, once in a while, and works at a lot of different locations, that worker is probably a contractor.If you check yes, that worker is more likely an employee.
12. Method of PaymentHow does the worker receive payments?Are there payments of regular amounts at set intervals? If the worker gets paid every week, or every two weeks, that worker is probably an employee. If the worker comes in like a plumber, fixes the leaky pipe and hands you an invoice, and does his work the way he wants to do it, does not submit any kind of written reports, with his own truck and tools at any time he wants, once in a while, and works at a lot of different locations, that worker is probably a contractor.If you check yes, that worker is more likely an employee.
13. Payment of Business and Travel ExpensesDoes the worker receive payment for business and travel expenses? If the worker gets paid for business and travel expenses, that worker is probably an employee. If the worker comes in like a plumber, fixes the leaky pipe and hands you an invoice, does not get paid travel expenses, and does his work the way he wants to do it, does not submit any kind of written reports, with his own truck and tools at any time he wants, once in a while, and works at a lot of different locations, that worker is probably a contractor.If you check yes, that worker is more likely an employee.
14. Furnishing of tools and materialsDoes the worker rely on the employer for tools and materials? If the worker needs to be at your office at 9 am, uses your desk, your computer, your software, and clocks out at 5 p.m. and leaves your office, and comes mostly every day, that worker is probably and employee. If the worker comes in like a plumber, with his own truck and tools at any time he wants, once in a while, that worker is probably a contractor.If you check yes, that worker is more likely an employee.
15. InvestmentHas the worker made an investment in the facilities or equipment used to perform services? If the worker needs to be at your office at 9 am, uses your desk, your computer, your software, and clocks out at 5 p.m. and leaves your office, and comes mostly every day, that worker is probably and employee. If the worker comes in like a plumber, with his own truck and tools and insurance that he bought himself, that worker is probably a contractor.If you check yes, that worker is more likely an employee.
16. Risk of LossIs the payment made to the worker on a fixed basis regardless of profitability or loss? If the worker gets a weekly or biweekly salary, or a regular amount of money on a regular basis, that worker is probably and employee. If the worker shows up and does not know whether he will get the work or whether he will be paid, that worker is probably a contractor.If you check yes, that worker is more likely an employee.
17. Working for more than one company at a timeDoes the worker only work for one employer at a time? If the worker needs to be at your office at 9 am, uses your desk, your computer, your software, and clocks out at 5 p.m. and leaves your office, and comes mostly every day, that worker is probably and employee. If the worker comes in like a plumber, with his own truck and tools and insurance that he bought himself, and then heads out to another job or jobs, that worker is probably a contractor.If you check yes, that worker is more likely an employee.
18. Availability of services to the general publicAre the services offered to the employer unavailable to the general public? If the worker needs to be at your office at 9 am, uses your desk, your computer, your software, and clocks out at 5 p.m. and leaves your office, and comes mostly every day, that worker is probably and employee. If the worker comes in like a plumber, with his own truck and tools and insurance that he bought himself, and has a website or Yellow Pages advertisement or otherwise allows himself to be hired out to others as the way he makes his income, that worker is probably a contractor.If you check yes, that worker is more likely an employee.
19. Right to dischargeCan the worker be fired by the employer? If you can fire the worker at any time, he may be considered to be an employee. (This is not the strongest test because usually an employer can also fire a plumber or any kind of contractor.)If you check yes, that worker is more likely an employee.
20. Right to quitCan the worker quit work at any time without liability If the worker can quit at any time, he may be considered to be an employee. (This is not the strongest test because usually a contractor can quit a job for a number of reasons — a plumber doesn’t have to take abuse, for example.)If you check yes, that worker is more likely an employee.
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