Independent Contractor or Employee?

As business owners it is important to know the correct employment classification of the individuals assisting you with your business.  Are they employees or are they independent contractors?

The penalty for misclassifying an individual can be costly.  The State of Oregon has the right to impose back taxes, penalties, and interest if they determine you misclassified an individual as an independent contractor.

To help you determine who is an employee and who isn’t, we have listed below the four main criteria used by the State of Oregon in determining whether or not someone is an independent contractor.  The individual must meet all four of these criteria.

1. The individual must be free from your direction and control

  • Has the necessary skills and training to complete the job
  • Sets own hours
  • Provides own equipment and tools to complete the job
  • Provides own supplies necessary to complete the job

2. The individual is engaged in an independently established business

  •  Has a business location
  • Actively advertises services
  • Performs similar services for multiple customers
  • Determines own price for contracted services
  • Must legally complete each contract
  • Has right to hire and fire workers
  • Personally liable for errors and/or accidents
  • Files self-employment taxes and receives a Form 1099-MISC each year

3. The individual has a license to perform the service, if required

4. The individual is responsible for other licenses or certificates needed to do      the work

Individuals not meeting these requirements are considered to be employees of your business.  Their compensation must be reported and taxes must be withheld from their checks.  They will receive a Form W-2 at the end of the year.

In recent years, our firm has assisted with numerous Oregon Employment Department audits.  The auditors are looking for individuals who are being treated as independent contractors in error.  The most common misclassifications are found with consultants, janitorial services, temporary help, bookkeepers, etc.  If these individuals are used in the course of your business and they do not meet the above criteria, our recommendation is to begin paying them as employees to limit the amount of penalty you can be assessed.

If you have any questions or would like to discuss a situation in your office, please contact us.

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