Independent Contractor or Employee...Why it Matters

Tax attorney Robert L. Wood, of Wood, LLP spoke with the Tax Law Channel about the distinction between an employee and independent contractor and the associated tax implications.  A regular employee gets a W2 and payroll tax withholding, where an independent contractor gets a gross check with no withholdings.  For an employer, when paying an independent contractor, there is a lack of employment taxes and the worker has to do the withholdings.

Source: blog.dollardays.com

Wood says that some employers, even today, are surprised when they label someone as an independent contractor, even with a written agreement that specifies so, and some government agency or private party comes months or years later with a lawsuit and says they have an obligation.  These are highly emotional disputes because there are many distinctions involved and these distinctions "become so vitriolic," says Wood.  He adds that many employers find it odd that a worker signs an agreement that they're an independent contractor and will pay their on taxes, yet files a claim later on.  A lot comes down to very pivotal, fundamental distinctions.

There is a dichotomy between someone who is a full-time employee and someone who is not an employee at all, notes Wood.  He says that an employer should apply the same criteria regardless of how many hours or percentage of time they're working.  The employer needs to look at the overall factors, such as tools and equipment control supply, as how they're paid matters.  Being paid by the hour is more consistent with employment, as being paid by the job is more consistent with an independent contractor.  

However, very frequently these rules have exceptions and these exceptions have exceptions, says Wood.  For example, lawyers are most typically paid by the hour and if you hire a lawyer for a 5 hour contract review, that's an independent contractor relationship, as the lawyer does not become an employee.

Overall, Wood agrees that it is important for an employer to look at this very carefully to avoid any potential penalties.

For more information on this matter, you can read Robert Wood's article.  Attorney Robert Wood, of Wood, LLP is one of the nation's premier experts on taxation, taxable damages, structured settlements and qualified settlement funds.