Is it an employee or independent contractor relationship?

One of the first determinations an employer must make is whether the new hire is an employee or an independent contractor. This determination has important implications for an employer's liability for withholding for income tax, FICA, and FUTA, as well as its obligations under the Fair Labor Standards Act (FLSA). Generally, if a worker is classified as an employee, the employer must withhold for FICA and income taxes, and must pay FUTA taxes. In addition, independent contractors are not entitled to the benefits of the FLSA.

Classification for employment tax purposes. A worker may be classified as an employee or independent contractor under one of the following methods:

1. The common law rule, as applied by the IRS in a 20-factor test (see ¶36,120 );

2. Various statutory rules (see ¶36,130 ); or

3. The Section 530 safe harbor rule (see ¶36,140 ).

FLSA rules. There is no single factor, rule or test for determining whether an individual is an independent contractor or an employee for purposes of the FLSA. It is the total activity or situation that is controlling. Among the significant factors are:

1. The extent to which the services rendered are an integral part of the principal's business;

2. The permanency of the relationship;

3. The amount of individual investment in facilities and equipment;

4. The opportunities for profit or loss;

5. The degree of independent business organization and operation;

6. The nature and degree of control by the principal; and

7. The degree of independent initiative, judgment, or foresight exercised by the worker.