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Types of workers

We categorize workers in many ways: part-time, on-call, day workers, full-time employees, independent contractors. So what paperwork and taxes are required for each?

The IRS has two classifications - employees and non-employees. On the surface,the IRS makes it pretty simple - if a worker doesn't fall into the non-employee category, she is automatically an employee.

IRS rules and laws determine whether a worker falls into the non-employee category - not agreements between workers and businesses - or even contracts. Certain workers are always non-employees (called statutory non-employees). These include

  • Direct sellers who sell products door-to-door to the final user
  • Licensed real estate agents
The other non-employee is an independent contractor. Before we get to describing independent contractors, please note that part-time, on-call, and day workers are all employees, and you are their employer. So even though a worker may only work for you for a very short period of time, they are employees and you have to file employer paperwork.

So what is an independent contractor? Independent contractors operate their own business, take entrepreneurial risk, get their own clients, and have their own tools. They are generally paid by the job, not by the hour. They have the right to use others to do the actual work. Independent contractors can't be "fired" - they can only have their contract terminated for cause.

Some workers must be classified as employees even if they meet the criteria above. The IRS has four groups that are automatically employees:

  • Food (except milk) and laundry drivers;
  • Full-time traveling salespeople who sell goods to people who will re-sell the item;
  • Full-time life insurance agents working mainly for one firm
  • At-home workers who are supplied with the materials or goods and are given specifications of the work to be done.
The $600 rule Some employers erroneously think that you have to pay someone $600 before they become an employee. The $600 rule only applies to the requirement for filing a W-2. Usually this applies to day laborers. These workers are still employees and you are liable for providing workers compensation insurance, deducting employee taxes, and paying employer taxes. While it is hard to track and enforce these requirements, you should be aware that legally you are their employer.

Click here for the criteria used by the IRS to determine whether a worker is an independent contractor.

Independent contractor / employee checklist - developed by the Society of Human Resource Management

Click here for a sample independent contractor agreement.

Information about Employee vs. Independent Contractor from the Tennessee Society of CPAs

The information here is a summary and is provided as a public service under contract with Startupkits.com. Please visit the IRS website for complete information.