"I'm a pharmacy owner. How do I know if delivery drivers that work for me or contractors or employees?"
We get this question all the time because when people start a business it's much easier in their minds to call everybody a contractor and not have to set up payroll, do withholding, and all the activities that comes along with payroll. The problem is the IRS loves to come in and say "no those are actually employees" because they want the employer paying unemployment, Social Security, and Medicare on these people.
The IRS has three broad tests that you have to look at to determine whether you have an employee or contractor.
Who decides when the person or the employee is going to work? How many hours are they going to work? Are you dictating "You got to work until 5pm" versus "Hey, I just want a job done sometime in the next few weeks". Who is controlling their schedule? If you are controlling their schedule, then they lean more towards that person being an employee versus a contractor.
For the second test, you must ask yourself whether there is a profit opportunity for the employee or contractor. In other words, if you tell somebody you're going to pay them $10/hour to work at your office to do bookkeeping, then that leans more towards being an employee. But if they're paid a certain amount each month for a project, and depending on how fast they do it or how much materials they use, they might make more or less money and that yields more towards being a contractor.
It's also important to look at who's equipment they're going to use. If someone comes in your office, using your computer, sitting at one of your desks, not paying rent, the IRS is going to say that's an employee. On the other side, if you hire an IT company to come in and overhaul your server, set up some software, and they've got their own equipment, then that yields more towards being a contractor.
This comes down to whether it's a temporary job or a permanent job. You can have a temporary employee, but the more temporary the assignment the easier it is to consider them a contractor. The IRS will also look at whether you have contracts with these people. What is the language of the contractors? What risk is put on them versus what risk is put on you? Then they also look at how the parties perceive their relationship. Does the person you're hiring think that they're an employee or a contractor?
It's not a black and white answer, but typically the IRS' motive is going to yield more towards saying that someone is an employee. So if you're going to call them a contractor you really need to look at these three tests to make sure that if IRS challenges anything, you'll prevail.
If you have any questions about your business, text them to me at 501-762-0116.
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