Employee or Independent Contractor? How do we know and why does it matter?

Let’s start with a simple scenario to highlight the issue: An Attorney has his office painted throughout the year by a group of workers. They come in before office hours to make sure the day to day operations of the firm are not interrupted. The work consists of touch up and minor paint jobs throughout the office. Are they employees, where payroll taxes should be withheld on each check and a W2 issued at the end of the year, or Independent Contractors, where a 1099 should be issued when payments exceed $600 for the year? Before we give the answer, let’s briefly define what an Employee and an Independent Contractor is based on how the EDD (Employment Development Department) defines them.

Employee – 
  • Told when to show up and leave work
  • Paid by time or a piece rate
  • Provided with supplies, and tools to complete their work

Independent Contractor – 

  • Engaged in separately established business
  • Control when to show up and complete the work
  • Right to control the way the work is completed
  • Customarily perform jobs for more than one business
So what is the answer to the correct classification of the painters as employees or independent contractors in our scenario? According to the EDD, which had a case with similar circumstances to the ones above, the painters are employees. To come to their conclusion, the EDD uses specific criteria that receive different weights depending on the issue at hand. They decide on a case in whole by looking at all the factors together. Even though the painters provided their own supplies and tools, they were told when to show up and their work was not specific to one job alone, but to continual touch up work. Since the criteria leaned in favor of an employee classification the EDD ruled as such.
So what happens if the attorney had been classifying the painters as independent contractors? That attorney now owes back payroll taxes along with penalties and interest for the entire time of employment. This can lead to a large financial burden and can be avoided. The EDD has several worksheets and guides on their website to help taxpayers decide the correct classification. See the below links for a few helpful guides.
Incorrect classification of workers can have large consequences for the business owner. A little bit of time spent on analyzing your specific circumstances can save you a lot of time and financial pain in the future.