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This section of the site is currently only available in English. Home Employing people Becoming an employer and ongoing obligations. It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold and pay income taxes, social security taxes and Medicare taxes as well as pay unemployment tax on wages paid to an employee.
You do not generally have to withhold or pay any taxes on payments to independent contractors. Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be:. In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
Facts that provide evidence of the degree of control and independence fall into three categories:. Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. Also, factors which are relevant in one situation may not be relevant in another. A labour hire worker from an agency can be either an employee or a contractor of the labour hire agency which provides the worker's services.
The agency is responsible for providing their employees with employment entitlements such as leave. Just because someone is hired for a few hours or a couple of days at a time, doesn't mean they're automatically a contractor. Both employees and contractors can be hired for:.
Having an ABN is not the deciding factor of whether or not a worker is a contractor. Many factors of the working arrangement are relevant. Just because a person submits an invoice, it doesn't necessarily mean they are a contractor.
Other factors also need to be considered. Just because contracting arrangements are common in an industry, it doesn't necessarily mean that a particular person should be treated as a contractor. This page is part of the Guide to starting a business.
Learn the other steps to get your business up and running. We acknowledge the traditional owners of the country throughout Australia and their continuing connection to land, sea and community.
Misclassifying an employee as an IC can result in state and federal fines and penalties. Several federal and state agencies have tests and requirements for independent contractor status, including the IRS, the Department of Labor, and state employment agencies. Here's a quick review of the requirements for these entities:. For various reasons mostly to do with payroll taxes , the IRS is concerned that workers are appropriately classified as either independent contractors or employees.
The IRS considers that worker to be an employee unless you can prove otherwise. The IRS determines the status of workers on a case-by-case basis, and it looks at behavioral, financial, and control factors to determine status. If you are unclear about the status of people who work for your business, you can request a determination from the IRS.
The DOL says that if an "employment relationship" is present between the worker and the employer, the worker is covered under the provisions of the FLSA for several purposes, including:. There's no single rule or test that can be used to determine whether an employment relationship exists.
It's the total activity or situation which controls. The existence of an employment contract doesn't, the place where the work is performed, or whether the person must be licensed by a state or locality.
States classify workers to determine their eligibility for state programs, especially unemployment insurance and worker's compensation. For example, California and some other states use a three-factor ABC test in which all three factors must be met for the person to be considered an independent contractor. The IRS, Department of Labor, and individual states have different requirements and purposes for independent contractor status.
An individual may be classified as an independent contractor for one purpose under one agency and as an employee for another purpose. An independent contracto r is someone who does work for another person or company. Independent contractors are business owners who are in a trade, business, or profession and who offer their services to the general public. Someone is an independent contractor if the person paying them can only control or direct the result of the work.
An example of an independent contractor is a cleaning service. The service comes into your office to do work, but the cleaning service workers are not employees of your company. You can tell them which offices to clean and when you want them to clean, but you can't tell them what cleaning supplies to use or how to run the vacuum cleaner.
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