Are the workers you employ on the job site considered employees or independent contractors? This is an important distinction that contractors and subcontractors must understand for many purposes, including federal taxes. The classification of your workers can affect their federal income, social security, and Medicare taxes, and the type of benefits they can receive.
When determining whether workers should be classified as employees or independent contractors, courts generally look at three key factors: behavioral control, financial control, and the relationship of the parties.
Behavior control concerns the business’s right to direct or control how the worker does its work. A worker is likely to be considered an employee when the business maintains behavior control. Such control can be exercised by giving instructions. This would include instructions on how, when, or where to do the work, what tools or equipment to use, who to hire to help with the work, or where to purchase the supplies to be used. Behavioral control can also occur through training. If the business provides training to tell the worker to do the work in a certain manner then the worker is more likely to be an employee.
Financial control concerns the business’s right to direct or control the financial and business aspect of the worker’s job. The more the worker can control the financial aspects of the job, the more likely the IRS will consider it to be an independent contractor. Important factors include: if the worker has made a significant investment in its work, like in its tools or facilities; is not reimbursed for its expenses by the business; or can experience a loss or profit from its work.
Treatment by the Parties
The relationship of the parties is also an important factor in determining whether a worker is an employee or independent contractor. This factor focuses on how the business and worker view their relationship. Employees will tend to have certain benefits, like insurance, healthcare, pension, or paid leave. This is not, however, an absolute factor. The IRS will also look at the contract and how it describes the relationship between the parties to determine whether the worker is an independent contractor or an employee. If the work performed by the worker is an important aspect of the business’s work, then the worker might be considered an employee.
Contractors and subcontractors have come under increased scrutiny from federal and state regulators for classifying employees and independent contractors. It is important that companies in the construction industry perform an internal audit to determine the status of their workers by remembering the factor’s identified above.