Ask SCORE: Is a worker an employee or an independent contractor?

by Joe Heinrich and Guy Towle, SCORE Volunteers

As mentors to SCORE clients, we are often asked by our clients, “Should I hire this person as an employee or engage them as an independent contractor to do the work I have for them?” Often, our immediate response is to suggest the least costly alternative, which is to engage the person as an independent contractor as then the client can avoid all the payroll taxes associated with an employee.

However, this advice does not take into consideration the very restrictive State of Washington statutes as they pertain to the determination of an employee vs. an independent contractor. So, let’s take a look at the applicable law. 

Washington Independent Contractor Test

Washington statute RCW 51.08.195 provides a six-part test to determine if a worker can be classified as an independent contractor and thus be exempt from Washington Labor & Industry premiums and Washington Unemployment Tax. In order to classify the worker as an independent contractor, the worker must meet ALL six parts of the test. If the worker does not meet any of the six parts, the worker is defaulted to being an employee.

Following are the six parts to the test:

1. Be free from your direction and control.

2. Need to pass one of the following three subtests:

a. Perform a service which is outside the course of your business or,
b. Perform the service away from all your business locations, including all your job sites or,
c. Be responsible, both under the contract and in fact, for the costs of the principal place of business from which the service is performed.

3. Need to pass one of the following two subtests:

a. Be customarily engaged in their own business to provide the services which are of the same nature as those performed under the contract or,
b. Provide a principal place of business that qualifies for an IRS business deduction; the place must be used regularly and exclusively for business purposes.

4. Be required under IRS rules to file a business tax return with the IRS.

5. Have an active account and an active unified business identifier number (UBI) with the Department of Revenue.

6. Maintain their own set of books and records showing business income and expenses.

There’s an additional requirement for the construction trades:

7. The individual must have a valid contractor registration pursuant to chapter 18.27 RCW or an electrical contractor license pursuant to chapter 19.28 RCW.

Other Requirements

After reviewing these tests with the SCORE client, more often than not the worker cannot be classified as an independent contractor and thus must be classified as an employee. However, if the worker does meet all these tests, then there are a few other requirements for the business engaging the independent contractor, which are:

1. There needs to be a written independent contractor agreement between the business and the worker.
2. The business cannot pay the independent contractor for services until the business has received a bona fide invoice from the independent contractor, detailing the services provided and the amount to be paid.
3. The business must provide the IRS and the independent contractor a Form 1099 msc within 31 days after the end of the calendar year if payments to that independent contractor exceeded $600.

 

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