Employer's Responsibility for Contract Labor Withholding

The IRS has set guidelines for contract labor withholding based upon employment status.
The IRS has set guidelines for contract labor withholding based upon employment status. (Image: Comstock Images/Comstock/Getty Images)

The U.S. Internal Revenue Service has established specific employer guidelines to determine a worker's employment status. The government defines contract labor as independent contractors, leased employees or statutory non-employees. Employers declaring employees as contingent workers without a reasonable basis for doing so are liable for all withholding taxes of that employee and face both state and federal fines. Employers having difficulties can use IRS Form SS-8 to help determine their employee status.

Independent Contractor Guidelines

Independent contractors pursue an independent trade, business or profession in which they offer a contracted service. The IRS considers a worker an independent contractor if the employer controls or directs the contracted result but not the means or the methods used to accomplish the result. Independent contractors have "self-employed" tax status and are required to file as small business. Employers are required to submit IRS Form 1099 MISC to the IRS, the independent contractor and to the state Department of Revenue where the contractor resides if the contract laborer's yearly compensation exceeds $600.

Leased Employee Guidelines

Leased employees fall under the category of contract labor. Companies furnish employees as workers to other businesses. These contracts specify worker services, and a fee is paid for staffing the business. Under this contract arrangement, the company that furnishes the employees is responsible for payroll withholding as long as the number of leased employees does not exceed 20 percent of the business’ compensated workforce.

Statutory Non-Employee Guidelines

Employers contracting with statutory non-employees such as direct sellers, licensed real estate agents and certain companion sitters such as home daycare providers are not required to withhold payroll taxes. The IRS considers direct sellers, licensed real estate agents and other statutory non-employees as self-employed for federal tax purposes.

General Contact Labor Guidelines

Employers must keep accurate employment and withholding records, which will enable the IRS to ascertain correct employee status and the employer's tax liability. Records for contingent workers should include any employment contracts or time sheet records, the date, amount and payment record for each payment made, any 1099 MISC filing, records of any voluntary withholding agreements and the worker's name, address and Social Security number.

State Withholding Guidelines

Employer responsibility for withholding state taxes for contract laborers varies by state. Most states use federal employee guidelines, but be sure to research employee tax-withholding information from your state’s department of revenue.

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