How to Classify an Independent Contractor vs. an Employee

How to Classify an Independent Contractor vs. an Employee

The rise of the gig economy has stimulated a lot of discussion in the media regarding how to classify an independent contractor vs. an employee while staying on the right side of employment laws. If you’re an employer, you may see advantages to hiring contractors instead of employees, particularly when needs for workers expand and contract. However, if you aren’t fully aware of what legally differentiates the two, you could set yourself up for future legal problems and issues with the IRS.

Employee Classification Rules in the State of Missouri

All 50 states have their own rules for defining who is, and who isn’t, an employee or contractor. The Missouri Department of Labor & Industrial Relations (MDLIR) uses the IRS 20-factor test as a guide for determining the difference between an independent contractor vs. an employee. However, MDLIR and Missouri Division of Employment Security (MDES) do not consider the test to be definitive when it comes to classifying a worker. Instead, enforcement of the rule falls upon the employer’s right to control a worker. 

If you’re not sure how to classify an independent contractor vs. an employee in the state of Missouri, consult with our business litigation attorney to learn more about the differences.

Ways to Categorize Workers in Missouri

The four categories of employment in Missouri include:

  • Common law employee (common law definition of employee)
  • Independent contractor (worker not defined as employee under common law)
  • Statutory employee
  • Statutory exempt employee.

Missouri uses the common law legal system to determine whether a worker is an independent contractor or an employee when the status of the worker isn’t defined by statute. In the event a worker is providing a service for wages, and the employer can control how the work is to be performed and when, the worker must be considered an employee regardless of the job title given to them by their employer.

How Federal Laws Define the Difference Between an Independent Contractor vs. an Employee

Employee classification laws have come before the U.S. Supreme Court multiple times, with the court issuing rulings that there is no single rule or test that defines an independent contractor or employee, according to the Fair Labor Standards Act (FLSA). The (FLSA) and the IRS both use similar tests or rules that determine the difference between an independent contractor and an employee.

The FLSA lists the following characteristics as being considered significant when defining either role:

  • Permanency of the relationship
  • Amount of alleged contractor’s investment in tools and the facility 
  • The extensiveness of services rendered in terms of how integral they are to the operation of the business
  • The nature and degree of control by the employer
  • The alleged contractor’s opportunity for profit or loss
  • The degree of independent business operation and organization
  • The amount of involvement in open market competition with others for the success of an independent contractor.

In summary, an employee can be compelled to work a 40-hour workweek for an employer while having full access to tools and equipment needed to do their job. The employer has the right to control their work in return for an agreed-upon wage that’s not less than the state or federal minimum wage. An employer can also require the employee to wear a uniform as a requirement of their position.

An employer cannot compel an independent contractor to do any of these things, and the employer has to allow the independent contractor to perform the work as they see fit.

The contractor may use their own tools and equipment, or enter into a lease agreement with the employer to use their equipment or tools, to avoid being classified as an employee. Finally, an employer cannot restrict an independent contractor from working for another employer at the same time. An independent contractor trades their employment security and minimum wage laws for the right to work for any business at any time and simultaneously if they so choose.

How to Classify an Independent Contractor vs. an Employee According to the IRS

The IRS doesn’t have direct enforcement powers when it comes to defining employees and independent contractors. What it does have is the ability to fine employers who classify their employees as contractors, then proceed to control their contractors and fail to pay FICA taxes on their wages. As previously noted, the state of Missouri uses the IRS 20-factor test for defining an employee versus independent contractor, but the IRS also provides a definition for taxation purposes.

The IRS states that an independent contractor is someone performing a service for a payor who has the right to direct or control only the result of the work and not how or what will be done. An employee is someone who performs services that an employer can control in terms of how and what will be done. The employer has the legal right to control how services are performed by a worker.

Employers who decide they want to maintain control over their employees are required by federal law to collect FICA taxes and remit them to the IRS on behalf of the employee. That means giving out a Form W-4 for an employee to fill out and give to the employer. The employer takes the information from the form and uses it to remit the FICA taxes to the IRS, then issue the employee a Form W-2 at the end of the year. Some employers find they don’t want to put in the effort of withholding payroll taxes, so they classify their workers as independent contractors instead. This is considered improper classification and can result in fines and penalties from the IRS and state of Missouri.

In contrast, the IRS puts the burden of tax compliance and remittance on the independent contractor. An employer who enters into an agreement with an independent contractor only needs to collect a Social Security number or Employer Identification Number (EIN) from the contractor for filling out a 1099, and only if more than $600 was paid to said contractor in one year. The independent contractor has to pay their own FICA taxes.

Call the Birk Law Firm Today for Your Employment Issues

Get in touch with the Birk Law Firm at 573-332-8585 to speak with attorney Kelvin Birk for help with your employee classifications and any other legal need your business may have. He has over 20 years of experience in business law and focuses on finding solutions to problems before seeking litigation. Kelvin can help you find the answers you’re seeking, make sure your employees are properly classified, and help you with creating contracts for use with your contractors.

Attorney Kelvin Birk

Attorney Kelvin Birk

Kelvin Birk is a lawyer as well as a certified public accountant, with more than 30 years of experience in accounting and tax and business consulting, and more than 20 years of experience in numerous legal matters. This combined expertise allows our law firm to provide a level of service above that of other firms. Whatever your legal situation, your attorney at Birk Law Firm can counsel you as to the tax implications. We have experience in providing myriad legal representation services to residents of southeast Missouri and other areas.. [ Attorney Bio ]