Our business lawyers in Denver often get this question. While we’re tempted to quote the now deceased Supreme Court Justice Potter Stewart: “I know it when I see it” (when referring of course to pornography[!]), that just doesn’t cut it in the real word.
First and so we are all on the same page:
An EMPLOYEE is a person that has been hired by you to work at your place of business during the hours you dictate, doing a job that you describe, using goods and equipment that you supply (and that usually stays at the work place), and over whom you generally can direct and control. Oh yeah, and you pay the person, withhold appropriate taxes, and the like. An in-house painter that does nothing but paint buildings for your client, but who does it using your equipment, during your business hours, at and your direction and control would be an employee.
An INDEPENDENT CONTRACTOR is a person or other business entity that is in a general sense assigned a project by you (e.g. painting a building) but who then is free to complete the project in a good and worker-like manner, using his or her own equipment, at a time that is appropriate for the contractor to complete the work, using his or her own methods of operation (e.g painting horizontally) and who is paid by you. The contractor is responsible for the payment of all taxes, is responsible for his or her own insurance, and generally is able to dictate how he or she operates the business.
The IRS has reduced the above to 3 general questions:
- Do you have the right to control and direct the person on not only what is to be done (go paint the building), but also how it is done (all of here at Left-Hand Painters paint only vertical lines starting at the bottom!)
- Do you control the financial aspects of the business: meaning do you pay the person a sum of money on a contract or do you pay the person hourly or a salary and then deduct taxes, etc?
- How do each of you perceive the relationship. If both of you see it as an employer-employee, or a principal-independent contractor relationship, then all is great. If one you has one idea, and the other has another, that’s when things get sticky. When in doubt, the IRS treats the person as an employee!
In Colorado, for instance a relationship is that of principal to independent contractor when:
- The principal does not require the individual to work for it exclusively except perhaps for the period of time specified in the contract.
- The principal does not establish a quality standard for the individual; except that it must be commercially reasonable.
- The principal does not pay a salary or an hourly rate but rather pays a fixed or contract rate
- The principal does not provide more than minimal training for the individual.
- The principal does not provide tools or benefits to the individual, except that materials and equipment may be supplied.
- The principal does not dictate the time of performance, except that hours may be established in the contract.
- The business and the individual do not combine business operations in any way