Facts that show the parties’ type of relationship include:
- Written contracts describing the relationship the parties intended to create.
- Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.
- The permanency of the relationship. Engaging a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally considered evidence that your intent is to create an employer-employee relationship.
- The extent to which services performed by the worker are a key aspect of the regular business of the business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and will have the right to control or direct that work. This indicates an employer-employee relationship.
For Internal Revenue Service help or federal tax information, contact the IRS at 800-829-1040. If you want the IRS to determine whether a worker is an employee, file Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.
Example 1
Paul Pick, a barber, signed a lease agreement with Larry Lord, the owner of a barber shop, to use a chair in Larry’s shop. Larry bears all the shop expenses, including rent, utilities, advertising, linens, and other supplies.
The agreement provides that 70 percent of the receipts from Paul’s chair go to him and 30 percent go to Larry. All receipts are put in Larry’s cash register. At the end of the week, he pays Paul the agreed percentage of the receipts.
Shop hours are displayed on the shop door. Paul is expected to comply with them. He must take customers in turn, maintain clean premises, use clean towels and sterile equipment, and keep a clean personal appearance. Although Larry does not supervise Paul, Larry can dismiss him for acting in a manner that would cause the loss of patrons, or for any other reason.
Larry does not direct or control Paul in the actual performance of his services, but he has the right to do so and to discharge him. Larry’s income depends on a percentage of Paul’s receipts. Thus, Larry retains the right to direct and control Paul to protect his investment and to be assured a sufficient profit from the shop. Paul has no investment in the shop, assumes no liability for its operation, and furnishes nothing except his personal services. Paul is an employee of Larry.
Example 2
Cosmetology Salons, Inc., leases space for beauty shops in department stores. Each department store pays the wages of the salon manager and operators on the basis of payrolls prepared by the manager. The department stores receive a fixed percentage of salon receipts as rent. Although a department store can request removing an operator or manager from a particular store, Cosmetology Salons, Inc., controls the hiring, training, transfer, and dismissal of all cosmetology salon personnel. The managers and operators employed in the shop are employees of Cosmetology Salons, Inc.
Example 3
Charlie Blue, the owner of a barber shop, and Sally Gold have an agreement under which Sally, a professional manicurist, furnishes manicuring services to shop patrons during business hours.
According to the agreement, Sally regulates her own hours, furnishes her own equipment and supplies, and keeps the proceeds from her work. She does not use the shop cash register nor does she report her earnings to Charlie. She does not have to perform her services personally but can hire a substitute. Charlie cannot direct the way she performs her services. Either party to the agreement can end the arrangement at any time.
Although Charlie has the right to dismiss her by ending the agreement, and although he furnishes her a place to work, he does not have the right to exercise over her work the degree of direction and control necessary to establish an employer-employee relationship. Therefore, Sally is self employed.