Ask any business person how to make more money and he'll tell you, "Don't have employees!"

Businesses, when encountering jobs of unusual complexity or responsibility, often take on the services of someone who is specifically skilled in that area. This situation poses an important question to the payroll department; for, if the new help can be classified as an independent contractor, the employer can escape payroll taxes; and, the independent contractor is responsible for all taxes on income earned. Accordingly, the contractor wages are not subject to retirement plan contributions, payment of employee benefits, or workmen's compensation insurance.

If the IRS were to inform you that the independent contractor status of your worker(s) has been disallowed, the repercussions are:

1. The employer is liable for all social security and unemployment taxes.
2. The worker is entitled to recover taxes paid that the employer should have paid.
3. Failure to file an information return increases penalties.
4. Unpaid employment taxes can be a felony as well as a personal liability of company officials.

The potential tax obligation and the interest and penalties which would ensue, provide plenty of incentive to avoid the risk of misclassification, even if it means a larger payroll expense now. But, if your help does qualify for independent contractor status, great! The savings are substantial. Therefore, it is vital to understand the difference between an employee and an independent contractor.

To determine whether an individual is an employee, 20 factors have been identified that indicate whether sufficient control is present to establish an employer-employee relationship. The degree of importance of each factor varies depending on the occupation and the context in which the services are performed. The 20 factors indicating whether an individual is an employee or an independent contractor are:

1. Instructions: An employee is required to comply with instructions about when, where, and how to work. Even if no instructions are given, the control factor is present if the employer has the right to give instructions.
2. Training: An employee is trained to perform services in a particular manner. Independent contractors ordinarily use their own methods and receive no training from the purchasers of their services.
3. Integration: An employee's services are integrated into the business operations because the services are important to the success or continuation of the business. This shows that the employee is subject to direction and control.
4. Services Rendered Personally: An employee renders services personally. This show that the employer is interested in the methods as well as the results.
5. Hiring Assistants: An employee works for an employer that hires, supervises, and pays assistants. An independent contractor hires, supervises, and pays assistants under a contract that requires him or her to provide materials and labor and to be responsible only for the result.
6. Continuing Relationship: An employee has a continuing relationship with an employer. This indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring although irregular intervals.
7. Set Hours of Work: An employee has set hours of work established by an employer. An independent contractor is the master of his or her own time.
8. Full-Time Work: An employee normally works full time for an employer. An independent contractor can work when and for whom he or she chooses.
9. Work Done on Premises: An employee works on the premises of an employer, or works on a route or at a location designated by an employer.
10. Order or Sequence Set: An employee must perform services in the order or sequence set by an employer. This shows that the employee is subject to direction and control.
11. Reports: An employee submits reports to an employer. This shows that the employee must account to the employer for his or her actions.
12. Payments: An employee is paid by the hour, week, or month. An independent contractor is paid by the job or on a straight commission.
13. Expenses: An employee's business and travel expenses are paid by an employer. This shows that the employee is subject to regulation and control.
14. Tools and Materials: An employee is furnished significant tools, materials, and other equipment by an employer.
15. Investment: An independent contractor has a significant investment in the facilities he or she uses in performing service for someone else.
16. Profit or Loss: An independent contractor can make a profit or suffer a loss.
17. Works for More Than One Person or Firm: An independent contractor gives his or her services to a multiple of unrelated persons or firms at the same time.
18. Offers Services to General Public: An independent contractor makes his or her services available to the general public.
19. Right to Fire: An employee can be fired by an employer. An independent contractor cannot be fired so long as he or she produces a result that meets the specification of their contract.
20. Right to Quit: An employee can quit his or her job at any time without incurring liability. An independent contractor usually agrees to complete a specific job and is responsible for its satisfactory completion, or is legally obligated to make good for failure to complete the job.