Employee or Independent Contractor in San Jose and Campbell, CA

As most employers know, the classification of a worker as an independent contractor or employee is a major consideration when it comes to taxes. It doesn’t necessarily matter how you label an employee; rather, the role the employee has and the nature of their job duties will play a huge part in determining their status.

Independent Contractor or Employee Campbell, CA?

Use these Resources to determine if your business utilizes Independent Contractors and for more information about Independent Contractors vs. Employees in San Jose

When you hire workers, they are either independent contractors or employees, and understanding the difference is crucial when it comes to recordkeeping and tax reporting. Making the determination can be a frustrating experience because the answer is not always clear. And because making the correct determination is critical, it is not always safe to rely on an “industry standard” or “custom” that automatically treats certain kinds of workers as independent contractors. To add to the confusion, the California test and the federal test to determine whether a worker is an employee or an independent contractor differ in some cases.

California Test for Employment in Campbell, CA

To determine if a worker is an independent contractor or an employee, look at the main test and the ten secondary factors.

Main Test

Does the principal (you) have the right to control the manner and means in which the worker carries out the job? The right of direction and control, whether or not exercised, is the most important factor in determining an employment relationship. The right to discharge a worker at will and without cause is strong evidence for the right of direction and control. When it is not clear whether you have the right to direct and control the worker, you must look further into the actual working relationship by weighing the ten secondary factors.

Secondary Factors in Determining Independent Contractors vs. Employees in San Jose

Depending on the type of relationship and the services performed, each factor varies in importance. Consider each factor independently, then consider them as a whole:

  1. Is the worker engaged in a distinct trade or occupation? Does the worker make his or her services available to the general public? Does the worker perform work for more than one firm/company at a time? Does the worker hire, supervise, or pay assistants? Does the worker have a substantial investment in equipment and facilities?
  2. Is the work done without supervision? In the geographic area and in the occupation, is the type of work usually done under the direction of a principal without supervision?
  3. Is the work highly skilled and specialized? Is the worker trained by the principal? Does the worker personally perform the services?
  4. Does the principal furnish/provide the tools, equipment, materials, supplies, and place of work? Does the worker perform the services on the principal’s business premises?
  5. Are the services provided on a long-term or repetitive basis?
  6. Method of payment – Is the worker paid based on time worked or on completion of the project?
  7. Are the services an integral part of the principal’s business?
  8. What type of relationship do the parties believe they are creating?
  9. What is the extent of actual control by the principal? Does the worker have the right to terminate the relationship without liability? Does the principal provide instructions on how to do the work? Does the principal establish the work hours or the number of hours to be worked? Does the principal require the work to be done in a particular order or sequence? Does the principal require oral or written reports from the worker?
  10. Is the work performed for the benefit of the principal’s business?

Internal Revenue Service Test for Employment Type: Independent Contractor or Employee?

To determine if a worker is an independent contractor or an employee, consider behavioral control, financial control, and relationship of the parties:

  • Behavioral Control– Generally, anyone who performs services for you is your employee if you have the right to control what will be done and how it will be done.
  • Financial Control– Who directs or controls the business aspects of work? Independent contractors are in business for themselves, offer their services to the public, and have a significant financial investment in the facilities used in performing services. They can realize a profit or incur a loss.
  • Relationship of the Parties– How do you and the worker perceive your relationship? A permanent relationship and worker benefits generally indicate an employer-employee relationship. However, the substance of the relationship determines whether your workers are employees, not a job title or written contract.

The IRS also provides information about independent contractor vs. employee on their website.

Statutory Employees and Nonemployees in San Jose

Certain categories of workers, including corporate officers, are considered by law to be statutory employees: other categories are exempt employees and treated like independent contractors. See Employer’s Supplemental Tax Guide (IRS Publication 15A), and California Employer’s Guide (DE 44) for more information.

If you’re confused about whether your bookkeeper, office handyman, or neighbor’s son is an independent contractor or employee, you can ask for help from the IRS or EDD to figure this out. You can complete an Employment Determination Guide (DE 38) to help you make a determination yourself; for a written determination, complete a DE 1870, Determination of Employee Work Status for Purposes of State of California Employment Taxes and Personal Income Tax Withholding, and send it to EDD. You can complete an IRS Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Tax and Income Tax Withholding, and send it to the IRS for a written determination.

Re-classifying A Worker

Re-classifying a worker can result in penalties, self-employment tax, and/or withholdings that an employer will suddenly be required to pay. If reclassification cases are not handled correctly, serious consequences can result, such as an employer or responsible party owing to trust fund recovery penalties. These consequences have huge implications for the business’ cash flow, tax liabilities, and more.

Please keep in mind, there is no hard and fast rule determining how to properly classify a worker. This means that sometimes an employer can be seemingly forced into a situation that they would have been otherwise able to avoid with professional guidance. A qualified tax professional can help you sort through the details of your unique employee circumstances to help you make a classification decision that is in your best interest.

Sequoia Tax Associates, Inc also provides following services in San Jose and all of California

Tax Planning or Damage Control?

Whether you are looking for expert tax planning to help you classify a worker properly and avoid any bumps, or you need fast damage control to help fix an existing classification situation, we are available for a no-obligation consultation today.

If you have any questions about employees or independent contractors, contact Michael W Ball for a consultation at Sequoia Tax Associates, Inc in Campbell at 669-293-0593.