The Internal Revenue Service (IRS) establishes the criteria for determining if a worker is an employee or an independent contractor. If you have employees and not independent contractors, you must act as a withholding agent on both the federal and state levels.
Employers: Do You Have Employees or Independent Contractors?
Review the information on the IRS web page Independent Contractor (Self-Employed) or Employee?
If you want the IRS to determine whether or not a worker is an employee, file IRS Form SS-8 (pdf) (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) with the IRS.
To talk to an IRS tax specialist, call 800-829-1040.
Wallace Black agreed with the Sawdust Company to supply the construction labor for a group of houses. The company agreed to pay all construction costs. Wallace supplies all the tools and equipment.
Wallace performs personal services as a carpenter and mechanic for an hourly wage. He also acts as superintendent and foreman and engages other individuals to assist him. The company has the right to select, approve or discharge any helper. A company representative makes frequent inspections of the construction site. When a house is finished, Wallace is paid a certain percentage of its costs. He is not responsible for faults, defects of construction, or wasteful operation. At the end of each week, he presents the company with a statement of the amount he has spent, including the payroll. The company gives him a check for that amount from which he pays the assistants, although he is not personally liable for their wages.
Wallace Black and his assistants are employees of Sawdust Company.
Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. She is to receive $1,280 every two weeks for the next 10 weeks. This is not considered payment by the hour. Even if she works more or less than 400 hours to complete the work, Vera will receive $6,400.
She also performs additional electrical installations under contracts with other companies, which she obtained through advertisements.
Vera is an independent contractor.
Rose Trucking contracts to deliver material to Forest Inc. at $140 per ton. Rose Trucking is not paid for any articles that are not delivered. At times, Jan Rose, who operates as Rose Trucking, may also lease another truck and engage a driver to complete the contract. All operating expenses, including insurance coverage, are paid by Jan Rose. All equipment is owned or rented by Jan, and she is responsible for all maintenance. None of the drivers are provided by Forest Inc.
Jan Rose, operating as Rose Trucking, is an independent contractor.
Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. She works six days a week and is on duty in Bob’s showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager’s approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager.
Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Bob. Bob also pays the cost of health insurance and group-term life insurance for Donna.
Donna is an employee of Bob Blue.
An auto sales agency furnishes space for Tim Brady to perform auto repair services. He provides his own tools, equipment, and supplies. He seeks out business from insurance adjusters and other individuals and does all the body and paint work that comes to the agency. Tim hires and discharges his own helpers, determines his own and his helpers’ working hours, quotes prices for repair work, makes all necessary adjustments, assumes all losses from uncollectible accounts, and receives, as compensation for his services, a large percentage of the gross collections from the auto repair shop.
Tim is an independent contractor and the helpers are his employees. Tim also has an Iowa sales tax permit, because auto and body repair are subject to sales tax in Iowa.
Barbers and Cosmetologists
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% of the receipts from Paul’s chair go to him and 30% 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.
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.
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.