As a business owner, it is important that you and your workers understand when they are employees and when they are independent contractors so that you can withhold employment and income taxes if required.
Under common law, the degree of control and independence in your relationship determine if a worker is an employee or an independent contractor. A number of factors may come into play, but they fall into three broad categories:
1. Behavioral Control: Do you (the business) have a right to direct or control how the work is being done? This can be done through instruction, training, or other means.
2. Financial Control: Do you have a right to direct or control the financial and business aspects of the worker’s job?
3. Relationship of the Parties: How do you and the worker perceive your relationship?
It can be hard to determine if someone is an employee or an independent contractor. No one factor alone defines the relationship, but neither is there a set or “magic” set of factors to rely on. All factors must be weighed; some may indicate the worker is an employee while others indicate he or she is an independent contractor.
If you and/or a worker have considered the above factors, but are still unclear whether they are an employee or independent contractor:
- Complete federal Form SS-8 and submit it to the IRS. Either of you may submit the form. Download Form SS-8 from the IRS website.
- Send a copy of the completed form to the Minnesota Department of Revenue.
- Once you receive a determination from the IRS, send a copy to the department too.
Liability for misclassified workers
If an employee is wrongly classified as an independent contractor when there is no reasonable basis for doing so, the business is liable for state employment taxes for that worker. The tax is equal to 3 percent of the misclassified worker’s salary, plus any additional penalties and interest that apply.
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