By Glenn M. Lyon, Esq., MacGregor Lyon

How an employer defines the relationship which exists when someone performs services can have a large impact on the way a business operates. A person performing services might be an independent contractor, a statutory employee, a common-law employee, or a statutory non-employee. An employer generally must withhold income tax, withhold and pay social security tax, and pay unemployment taxes on wages paid to an employee. A business does not usually have to withhold or pay taxes on money paid to independent contractors.

Misclassification of the employer-employee relationship is a prime area for IRS enforcement. The IRS has targeted the “contract labor” category of payment as one which is easily and frequently abused. They are taking a serious look at anyone classified as “contract” to be sure that they have not been misclassified by a firm which should more properly be called their employer.

If someone is truly an independent contractor, the business contracting for services must provide a 1099-MISC. to the individual if they were paid more than $600.00 in the calendar year. This is the “Statement to Recipients of Miscellaneous Income,” and copies must be filed with appropriate state and federal agencies, similar to a W-2.

The employer should also be aware that most states have separate sets of guidelines on what constitutes an employer/employee relationship. Frequently these differ dramatically from those of the federal government. You should review both sets of applicable criteria when deciding how to classify a worker. If you believe that your situation is unclear after reviewing the materials, you may complete FORM SS-8, and the Internal Revenue Service will make the decision for you.