Understanding Common-Law Employees

A common-law employee is an individual hired by an employer with the authority to supervise the employee's tasks. As a business owner, you are considered to have common-law employees if you have control over their work assignments and methods. Delve deeper into the concept of common-law employees, their qualifications, and the implications for businesses.

Defining Common-Law Employees

Common-law employees are individuals whose tasks are fully directed by their employer. The nature of the relationship between an employer and employee may vary, but factors that typically indicate a common-law employment relationship include:

The employer assigns specific work days and hours to the employee as needed.

The employee's decisions require approval from the employer, with oversight varying based on experience and tenure.

Customers are considered under the ownership of the employer.

The employee must provide regular reports to the employer.

The employee receives a fixed salary or hourly wage and benefits such as medical insurance.

Operations of Common-Law Employees

The differentiation between an employee and an independent contractor is crucial for tax purposes, specifically internal revenue and FICA tax deductions. Common-law employees have federal income tax and FICA taxes withheld from their earnings, with employers responsible for making these payments. Independent contractors, on the other hand, handle their own taxes without deductions from payments received.

The IRS employs guidelines to determine a worker's classification as a common-law employee or an independent contractor based on control and independence aspects relevant to each business situation. Factors leading to this determination include:

Behavioral control: Does the employer command what tasks are performed and how they are carried out by the worker?

Financial control: Does the employer manage financial aspects of the worker's tasks, such as reimbursement of expenses and provision of tools?

Relationship type: Are there formal contracts or employee benefits offered, and is the work integral to the business operations?

Many states now implement ABC tests to establish common-law employee or independent contractor status for state-specific taxes like income tax and unemployment taxes. These tests encompass:

Freedom from work direction

Distinctiveness from the employer's usual business activities

Engagement in independent or similar business

It is essential to ascertain the worker's status correctly as it affects tax obligations. The IRS and states generally consider a worker as an employee unless proven otherwise. Meeting the criteria for independent contractor classification can have significant financial impacts.