Iowa Department of Revenue
EMPLOYERS: DO YOU HAVE EMPLOYEES OR INDEPENDENT CONTRACTORS?

This information in this section is taken from the Internal Revenue Service.

You do not need to withhold income tax from wages paid to an independent contractor. To help you determine if your employees are actually independent contractors, consider the following factors issued by the Internal Revenue Service. They should help you determine if there is sufficient “control” present to establish an employer-employee relationship.

An employer must generally withhold federal income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. An employer does not generally have to withhold or pay any taxes on payments to independent contractors.

Common-Law Rules

To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the business must be examined. In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered.

Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties. These facts are discussed below.

Behavioral control.
Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:

Instructions that the business gives to the worker. An employee is generally subject to the business’ instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.

When and where to do the work.
What tools or equipment to use.
What workers to hire or to assist with the work.
Where to purchase supplies and services.
What work must be performed by a specified individual.
What order or sequence to follow.

The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.

Training that the business gives to the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.

Financial control.
Facts that show whether the business has a right to control the business aspects of the worker’s job include:

The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business.

The extent of the worker’s investment. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.

The extent to which the worker makes his or her services available to the relevant market. An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.

How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.

The extent to which the worker can realize a profit or loss. An independent contractor can make a profit or loss.

Type of relationship.
Facts that show the parties’ type of relationship include:

Written contracts describing the relationship the parties intended to create.

Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.

The permanency of the relationship. If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship.

The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

IRS help.
If you want the IRS to determine whether or not a worker is an employee, file IRS Form SS-8 (pdf), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

In doubtful cases, the facts will determine whether or not there is an actual employer-employee relationship. If you want the Internal Revenue Service to determine whether a worker is an employee, file IRS Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

To talk to an IRS tax specialist, call 1-800-829-1040.

If it is determined that you have employees and not independent contractors, you must act as a withholding agent on both the Federal and State levels.

Examples

Construction

Example 1.

Wallace Black agreed with the Sawdust Company to supply the construction labor for a group of houses. The company agreed to pay all construction costs. Wallace supplies all the tools and equipment.

Wallace performs personal services as a carpenter and mechanic for an hourly wage. He also acts as superintendent and foreman and engages other individuals to assist him. The company has the right to select, approve or discharge any helper. A company representative makes frequent inspections of the construction site. When a house is finished, Wallace is paid a certain percentage of its costs. He is not responsible for faults, defects of construction, or wasteful operation. At the end of each week, he presents the company with a statement of the amount he has spent, including the payroll. The company gives him a check for that amount from which he pays the assistants, although he is not personally liable for their wages.

Wallace Black and his assistants are employees of Sawdust Company.

Example 2.

Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. She is to receive $1,280 every two weeks for the next 10 weeks. This is not considered payment by the hour. Even if she works more or less than 400 hours to complete the work, Vera will receive $6,400.

She also performs additional electrical installations under contracts with other companies, which she obtained through advertisements.

Vera is an independent contractor.

Example

Trucking Industry

Rose Trucking contracts to deliver material to Forest Inc. at $140 per ton. Rose Trucking is not paid for any articles that are not delivered. At times, Jan Rose, who operates as Rose Trucking, may also lease another truck and engage a driver to complete the contract. All operating expenses, including insurance coverage, are paid by Jan Rose. All equipment is owned or rented by Jan, and she is responsible for all maintenance. None of the drivers are provided by Forest Inc.

Jan Rose, operating as Rose Trucking, is an independent contractor.

Examples

Automobile Industry

Example 1.

Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. She works six days a week and is on duty in Bob’s showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager’s approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager.

Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Bob. Bob also pays the cost of health insurance and group-term life insurance for Donna.

Donna is an employee of Bob Blue.

Example 2.

An auto sales agency furnishes space for Tim Brady to perform auto repair services. He provides his own tools, equipment, and supplies. He seeks out business from insurance adjusters and other individuals and does all the body and paint work that comes to the agency. Tim hires and discharges his own helpers, determines his own and his helpers’ working hours, quotes prices for repair work, makes all necessary adjustments, assumes all losses from uncollectible accounts, and receives, as compensation for his services, a large percentage of the gross collections from the auto repair shop.

Tim is an independent contractor and the helpers are his employees. Tim also has an Iowa sales tax permit, because auto and body repair are subject to sales tax in Iowa.

Examples

Barbers and Cosmetologists

Example 1.

Paul Pick, a barber, signed a lease agreement with Larry Lord, the owner of a barber shop, to use a chair in Larry’s shop. Larry bears all the shop expenses, including rent, utilities, advertising, linens, and other supplies.

The agreement provides that 70% of the receipts from Paul’s chair go to him and 30% go to Larry. All receipts are put in Larry’s cash register. At the end of the week, he pays Paul the agreed percentage of the receipts.

Shop hours are displayed on the shop door. Paul is expected to comply with them. He must take customers in turn, maintain clean premises, use clean towels and sterile equipment, and keep a clean personal appearance. Although Larry does not supervise Paul, Larry can dismiss him for acting in a manner that would cause the loss of patrons, or for any other reason.

Larry does not direct or control Paul in the actual performance of his services, but he has the right to do so and to discharge him. Larry’s income depends on a percentage of Paul’s receipts. Thus, Larry retains the right to direct and control Paul to protect his investment and to be assured a sufficient profit from the shop. Paul has no investment in the shop, assumes no liability for its operation, and furnishes nothing except his personal services. Paul is an employee of Larry.

Example 2.

Cosmetology Salons, Inc., leases space for beauty shops in department stores. Each department store pays the wages of the salon manager and operators on the basis of payrolls prepared by the manager. The department stores receive a fixed percentage of salon receipts as rent. Although a department store can request removing an operator or manager from a particular store, Cosmetology Salons, Inc., controls the hiring, training, transfer, and dismissal of all cosmetology salon personnel. The managers and operators employed in the shop are employees of Cosmetology Salons, Inc.

Example 3.

Charlie Blue, the owner of a barber shop, and Sally Gold have an agreement under which Sally, a professional manicurist, furnishes manicuring services to shop patrons during business hours.

According to the agreement, Sally regulates her own hours, furnishes her own equipment and supplies, and keeps the proceeds from her work. She does not use the shop cash register nor does she report her earnings to Charlie. She does not have to perform her services personally but can hire a substitute. Charlie cannot direct the way she performs her services. Either party to the agreement can end the arrangement at any time.

Although Charlie has the right to dismiss her by ending the agreement, and although he furnishes her a place to work, he does not have the right to exercise over her work the degree of direction and control necessary to establish an employer-employee relationship. Therefore, Sally is self employed.

78-505
updated February 24, 2005