Unless the worker is an independent contractor, the answer is always!

There are specific criteria to determine if a worker is an employee or an independent contractor. The key word in that sentence is “independent.”  The most important factor is who is in control.  This is covered in more detail in our March 2010 article Employee or Independent Contractor?

But there are several other issues that can also trip you up.

Do not use length of employment to determine worker status. A person who works for only part of one day is considered an employee, and all employment taxes apply.

Withhold FICA on part-timers. If someone who works for you part-time and also has a full-time job where they have had 100% of their FICA withheld for the year, you must withhold the full amount of FICA from their pay. These individuals can obtain a refund of any overpaid FICA on their 1040.

Withhold FICA on retirees. If a retiree receiving Social Security benefits works for you, employment taxes, including FICA, still apply.

Former employees who return as part-timers are probably employees—not independent contractors. If they do the same work they did before they left, especially in the same tax year, they are employees. The IRS targets individuals who receive a W-2 and 1099 from the same employer for the same year.

Pay employees for extra work as employees—not independent contractors.  Generally state and federal agencies will determine that all compensation should be classified as wages.  If your administrative assistant gets paid an additional amount to do the landscaping for your business, work that is outside the scope of his/her duties, check with your CPA before paying that employee as an independent contractor.

Overtime pay rules apply. Federal law requires paying the overtime rate for each hour worked over 40 hours in the workweek. This is determined by workweek not pay period, unless they are the same. Thus, if an employee normally works one day a week, then for some reason works 50 hours in another week, for that week you must pay 10 hours at the overtime rate. If your company’s normal workweek is less than 40 hours, company policy determines when overtime is applicable.

Benefits are optional. Generally, you do not have to pay part-time or summer help for holidays, sick days or vacation days and you need not include temps and part-timers in health, pension and other benefits. But to exclude them, have a written plan stating which benefits are not available to these workers.

State laws may have additional requirements.  As always, be sure to check with your CPA if you have questions.

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