Independent subcontractors are common service providers in the construction and other industries. It is critical that a business owner correctly determines whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.
The Illinois Employee Classification Act, effective in 2008, establishes specific criteria to determine if an individual performing services for a construction contractor is an employee or an independent contractor. While targeted specifically at the construction industry and for the collection of unemployment taxes by the Illinois Department of Employment Security (“IDES”), the criteria identified are likely to be used as a guide by other administrative agencies and for other industries. However, the substantial penalties and other remedies would apply only to the construction industry in
Under the law, an individual performing services for a contractor is presumed to be an employee unless:
- the individual is free from control or direction over the performance of the service for the contractor;
- the service performed is outside the usual course of services performed by the contractor and
- the individual is engaged in an independently established trade, occupation, profession or business.
The IDES looks to the actual rather than the alleged relationship of the parties, and the designations and terminology used in any agreements or contracts between them are not controlling.
Free from Direction or Control
In determining the relationship between the parties, "control" or "direction" means that an employer has the right to control and direct the worker, not only as to the work to be done, but also as to how it should be done, regardless of whether that control is actually exercised. Some of the numerous relevant factors considered include the right to change work methods, a set schedule requirement, is the relationship permanent, can the subcontractor hire/fire/pay its own assistants,
If these and other factors lead to the conclusion that the individual hired is under the direction and control of the employing entity, than that individual will be considered an employee.
Outside the Usual Course of Services
This factor is satisfied if the service provided by the individual is either outside the usual course of business of the employing entity or performed outside its place of business. A good example would be janitorial service to company that does not provide janitorial services - services which merely render the place of business more pleasant or are not necessary to the employing entity's business are outside the usual course of business.
Engaged in an Independently Established Trade, Occupation or Business
For determining independent contractor status, "engaged in an independently established trade, occupation, or business" is interpreted to mean that the individual has a proprietary interest in the business which he or she can sell, give away or operate without hindrance from any other party. While no one factor will determine if an individual is engaged in an independently established trade, occupation, profession or business, the business reality or "totality of the circumstances" will determine the presence of this condition. According to the regulations, the following factors are viewed to determine whether the individual is engaged in an independently established trade, occupation, profession or business: whether the individual offers his services to the general public; has its own tax, unemployment, and other state accounts for the payment of its various taxes; existence of an independent office location; separate licensing, when appropriate; and the right to keep profits or losses from the activity.
BOTTOM LINE
