California Worker Status: Employee or Independent Contractor

About a year and a half ago, I asked: What are the consequences of treating an employee as an independent contractor? Now, I ask: Are your California workers independent contractors or employees?

Knowing the proper worker classification can be critical to your business. Don’t guess. Act now to make certain you know for sure.

How you answer that question can have a significant impact on how much tax you pay as a California business owner. Whether your workers who may be based in Los Angeles County, Santa Barbara County, Ventura County or Orange County are or are not independent contractors will affect the amount of taxes you must withhold from their pay. It will affect how much additional cost your business must bear to conform to California’s labor code and other laws, what documents and information those workers must provide to you, and what tax documents you must give to them.

California employers who erroneously classify workers as independent contractors can end up with large tax liabilities as well as penalties and interest for failing to pay employment taxes and failing to file required tax forms. Workers can avoid higher taxes and lost benefits if they know their proper status.

By filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the Internal Revenue Service, both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee.

Generally, whether a worker is an independent contractor or an employee depends on how much control you have as the owner. Your California workers are most likely employees if you have the right to control or direct not only what is to be done but also how it is to be done. If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.

Three broad characteristics are used by the IRS to determine the relationship between businesses and workers – Financial Control, Behavioral Control and the Type of Relationship. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

Learn more about the determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, and Publication 1779, Independent Contractor or Employee.