Contractor or Employee?

What the difference is

between an employee and contractor?

Determining this is important for several reasons, including insurance, legal and tax issues

contractor or employee

If your association is determined to be an employer, you (maybe even you personally, as an officer of the corporation) are required to pay employment taxes by state and federal laws. In most cases, workmen’s compensation insurance is also required under state laws, and even when not legally required, associations should do so to avoid exposing association members to tremendous (and unlimited) liability. The most commonly recognized assessment is that of the IRS. Primarily, the decision as to whether or not an individual is a contractor or an employee hinges on the degree of control exercised over the individual. Some of the criteria the IRS considers include:

  • The individual’s ability to set his or her own hours and do the job in his or her own way.
  • The individual’s ability to use his or her own methods, as opposed to being required to undergo training from the purchaser of his or her services.
  • The individual can earn a profit or suffer a loss from the activity.
  • The individual is able to assign his or her own workers to do the job, and is not required to do it personally.
  • The individual is hired for one job, and does not have a continuing relationship.
  • The individual has more than one client at a time.
  • The individual pays his or her own business and traveling expenses.
  • The individual works some portion of time off the employer’s premises, and uses his or her own offices, desks and equipment.
  • The individual agrees to complete a specific job and is responsible for satisfactory completion, and is obligated to make good for any failure.

Written agreements may help establish the nature of the relationship; however, just calling the person a contractor or sub-contractor does NOT make any real difference. The agreement should spell out the scope of the work to be performed and when it will be performed, as well as how much he or she will be paid. However, an agreement alone will NOT avoid an independent contractor being reclassified as an employee, if most of the evaluation criteria indicates they are an employee.

Since many associations have multiple leaders who might supervise or direct work associations are always vulnerable to having a contractor reclassified as an employee because a director or committee person with good intentions, tells the worker to do or not to do things a certain way or at a certain time.

Before you take the easy way out, make sure you’ve carefully reviewed what your relationship will be with the individual you are going to hire. A few dollars saved today could be a costly mistake tomorrow.  We strongly urges all clients to never hire uninsured contractors or individuals, under any circumstances.