The Common Law Test is an IRS guide used to determine if a worker can be classified as an employee or an independent contractor. The common law test stipulates the nature of the work for an individual, whether the employer can assign tasks, and specify how to do specific tasks at the job.
Generally, when an employer can only assess a worker’s job upon completion and not control the process of it, they are identified as independent contractors.
On the other hand, workers monitored during the processes of tasks and judged based on the end result are defined as employees.
Independent Contractor vs Employee
A set of guidelines for the common law test, approved by the IRS, requires information or evidence to prove the degree of control associated between an employer and the worker, clearly delineating the differences between employers and independent workers.
For your information, here are the three categories that can help you identify further:
Behavioral: Is there any proof of control from the employer’s end regarding what the worker does on a daily basis? Or is someone in charge of monitoring the employee's work regularly? Is the employer in a position of power or control?
Financial: What are the payment terms between the worker and the employer? Is the payer controlling the payee until the job is completed? It can also include details such as expenses, tools, supplies, etc., required for the job. Every detail about the payment terms should be declared to understand whether the worker can be identified as an independent worker or an employee.
Type of Relationship: Is there proof of a written contract between the employer and worker containing the declaration of employee benefits, such as vacation, leaves, insurance, pension plans, etc.? Is there a time frame or the words “probation” or “full-time” mentioned in the contract?
Employee Compliance: Employees should comply with the employer’s job specifications and instructions on when, how, and where the job needs to be done. In the case of an independent contractor, these do not exist except for the final outcome of the job.
Training: There is no such thing called “on-the-job” training for independent contractors. They are generally hired for their expertise and experience.
Integration of Services: Services provided by employees are a vital part of their job role and daily operation, which does not apply to independent contractors.
Hiring, Paid Assistants, Supervising, Managing: Workers who engage in any of the mentioned activities is classified as an independent contractor.
Continued Relationship: Employees continue to serve the company for an ongoing period, whereby an independent contractor’s job ends with their contractual submissions.
Full-time: If there is any mention of full-time work, there likely exists a contract for the employee, as they must abide by the employer's work schedule, such as 9-5. For independent workers, there are no such rules. They do not have to commit to minimum work hours.
Worksite: Employees usually work on the employer’s premises unless they are on work-from-home terms. Those working on other premises are often independent contractors, as employers have no control over where they work. They could be working from a different continent, as long the job is getting done.
Reporting: Employees are likely to submit daily/weekly reports to their line managers or their employers directly.
Payment Terms: Employees are usually paid on a monthly or weekly basis, whereby independent contractors are paid based on individual or bulk jobs.
Work Expenses: For employers, any work-related expenses such as travel or meetings are covered by the employer, indicating employee status.
Termination Clause: Employees can be fired from the job, while independent contractors can’t (given that they have fulfilled and attended to the contract specifications). An employee can terminate their relationship with the employer at any time, but an independent contractor has certain liabilities, such as a breach of contract.
Withholding Payroll Taxes
Worker status determines if you must withhold social security numbers, medicare taxes, or income from the wage while processing payrolls. For employees, employers generally withhold two payroll taxes: medicare and social security. Furthermore, an employer’s share of medicare taxes and social security should be paid when a worker is identified as an employee.
Moreover, keep in mind that there are federal and state unemployment insurance contributions to factor in (usually made by the employer). Employers are expected to pay unemployment taxes as it is not retained from the employee’s paycheck.