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February 19, 2009

Common-law Employee

Your Guide

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Definition

Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.

To determine whether an individual is an employee or independent contractor under the common law, the relationship of the worker and the business must be examined. All evidence of control and independence must be considered. In an employee-independent contractor determination, all information that provides evidence of the degree of control and degree of independence must be considered.

Facts that provide evidence of the degree of control and independence fall into three categories:

    1. behavioral control,
    2. financial control, and
    3. the type of relationship of the parties.

Refer to Publication 15-A, Employer’s Supplemental Tax Guide for additional information.

A general rule is that anyone who performs services for you is your employee if you can control what will be done and how it will be done.

Example: Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. She works 6 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.

Referring Cite

IRC § § 3508; 3509

Additional Helpful Information

helpful links to the IRS Website

  • Worker Classification Webcast: A critical issue for all businesses is properly classifying workers as employees or independent contractors. The IRS’s archived Tax Talk Today Webcast, “What’s Hot in Employment Taxes: Independent Contractor or Employee?”, focuses exclusively on worker classification issues.
  • Tax Topic 762 Basic Information: To determine whether a worker is an independent contractor or an employee, you must examine the relationship between the worker and the business. All evidence of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories Behavioral Control, Financial Control, and the Type of Relationship itself.
  • Publication 1976, Section 530 Employment Tax Relief Requirements (PDF): Section 530 provides businesses with relief from Federal employment tax obligations if certain requirements are met.
  • IRS Internal Training:  Employee/Independent Contractor  (PDF): This manual provides you with the tools to make correct determinations of worker classifications. It discusses facts that may indicate the existence of an independent contractor or an employer-employee relationship.  This training manual is a guide and is not legally binding.   If you would like the IRS to make the determination of worker status, please file IRS Form SS-8.
  • Form SS-8 (PDF): Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
  • Publication 15-A : The Employer’s Supplemental Tax Guide has detailed guidance including information for specific industries.
  • Publication 15-B: The Employer’s Tax Guide to Fringe Benefits supplements Circular E (Pub. 15), Employer’s Tax Guide, and Publication 15-A, Employer’s Supplemental Tax Guide. It contains specialized and detailed information on the employment tax treatment of fringe benefits.
  • Businesses with Employees
  • Hiring Employees
  • Online Classroom, Lesson 6 – What you need to know about federal taxes when hiring employees/contractors
  • Distinguishing Between Self-Employed Individuals and Independent Contractors

This information was taken from the IRS’ website www.irs.gov

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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