Independent Contractors

Persons who follow a trade, business or professions such as lawyers, accountants or construction contractors who offer their services to the general public are usually considered independent contractors. The key characteristic of an independent contractor is the worker’s “independence.” An independent contractor relationship is a business-to-business relationship; it is NOT a business-to-individual relationship.

You will need to file a 1099 with the IRS at the end of the year to report the payments made to each contractor that is not a corporation. The IRS uses a list of factors to determine whether a worker is a common law employee or an independent contractor. The Colorado Unemployment Insurance Liability Unit and the Colorado Division of Workers’ Compensation use nine criteria established by state law (8-40-202 and 8-70-115, C.R.S.) to determine whether a worker is a common law employee or an independent contractor. As a general rule, any individual who performs services for pay for another is deemed to be an employee, unless it is shown that the worker is free from control and direction in the performance of the services and is customarily engaged in an independent trade, occupation, or business related to the service performed. The burden of proof is on the employer to show that the foregoing two tests are met. The employer may create a rebuttable presumption of an independent contractor relationship with a worker.

Use a Written Document or Contract that:

• is signed by both parties
• clearly discloses, in larger font, boldface or underline type, that the independent contractor is not entitled to unemployment insurance or workers’ compensation insurance, and
• states that the independent contractor is obligated to pay all federal and state income taxes on any money earned pursuant to the contract and provides that the person for whom the services are performed does not: require the individual to work exclusively for the person for whom services are performed, except that the individual may choose to work exclusively for the said person for a finite period of time specified in the document; establish a quality standard for the individual, except that such person can provide plans and specifications regarding the work but cannot oversee the actual work or instruct the individual as to how the work will be performed; pay a fixed or contract rate rather than a salary or hourly rate; terminate the work during the contract period unless the individual violates the terms of the contract or fails to produce a result that meets the specifications of the contract; provide more than minimal training for the individual employee; provide tools or benefits to the individual, except that materials and equipment may be supplied; dictate the time or performance, except that a completion schedule and a range of mutually agreeable work hours may be established; pay the individual personally, but make checks payable to the trade or business name of the individual; and combine his/her business operations in any way with the individual’s business but instead maintains such operations as separate and distinct.

The criteria stated above, along with other factors, form a basis for how the State distinguishes between employees and independent contractors. No one factor or criterion is by itself conclusive evidence that an individual worker is an employee or an independent contractor. The following is a summary of the reasoning used by the Colorado Courts in deciding unemployment insurance cases on the independent contractor vs. covered employee issue. Please note that this summary should not be considered a substitute for legal advice.

The question of control is related to general control and is not concerned with the fact that the worker can exercise his/her own judgment in performing the detail of the work. Control refers to the right to control and not to the actual control used by the company. The possibility of future control can be used in determining if an individual is free from control and direction. The power to terminate a contract for personal service at any time without liability is a strong indication of control. The right to terminate services at any time involves the right to control. This factor, in addition to the fact that the worker is required to use the material furnished by the company and meet the quality control standard of the company, is usually sufficient to establish control. Other factors that may be considered indicators of control are: the worker reports on a daily basis, the worker is provided with an outline of procedures, and the worker is obligated to keep records or uses the name of the company.

Even though the company retains no right to control the performance of the worker, the worker must be customarily engaged in an independent business related to the service performed. The worker is not customarily engaged in an independent trade, occupation, profession or business related to the service performed if the worker devotes his/her whole time to performing duties for one company, is not engaged in any other work and performs the service within the usual course of business of the company. A company contesting liability for unemployment compensation taxes under independent professional exception is required to prove not only that a worker is customarily established and engaged in an independent business, but also that the independent business is related to the services the worker is performing for the company and that the worker is engaged in the business venture at the same time the worker is providing services for the company.

Even though a contract is framed to suggest existence of an independent contractor and not an employer/employee relationship, that fact alone does not create an independent contractor relationship. What is done under the contract is more significant than what the contract says. A company cannot circumvent the intended protection of the Colorado Employment Security Act by means of a contract that would place in jeopardy the security of employees.

The following is a summary of some criteria used by the IRS in determining whether a worker is an employee or independent contractor:

• An employee has no potential for suffering a monetary loss in connection with the work performed.

• An independent contractor can make a profit or suffer a loss in connection with the work performed.

• An employee works on the premises of the employer or on a route or location designated by the employer.

• An independent contractor may perform work at her/his own business premises.

• An employee performs services personally.

• An independent contractor may subcontract all or part of a work assignment.

• An employee may have assistants who are paid by the employer.

• An independent contractor hires, supervises and pays for his/her own assistants.

If a worker is a common law employee, the employer is responsible for state and federal income tax withholding, social security taxes (FICA), and state and federal unemployment insurance taxes. All common law employees must be covered by a workers’ compensation insurance policy from the very beginning of employment. No distinction is made between different types of common law employees. Managers and supervisors are treated the same as line workers. There is no difference between full-time or part-time employees or employees hired for only a short period of time.

An independent contractor is responsible for his/her own self-employment taxes. If she/he has employees, she/he also has the obligation to comply with all employer responsibilities including workers’ compensation insurance for his/her employees. If the independent contractor does not have and maintain workers’ compensation insurance, the prime contractor is responsible for providing coverage. The prime contractor may recover from the independent contractor the cost of providing workers’ compensation insurance to the independent contractor’s employees.

If you are not sure whether your workers are employees or independent contractors, you should contact the IRS, the Colorado Division of Workers’ Compensation, and the Unemployment Insurance Tax Liability Unit of the Colorado Division of Employment and Training for a determination of an actual employer/employee relationship. Potentially, a worker could be considered an employee by one agency and an independent contractor by another. Form SS-8, “Determination of Employee Work Status for Purpose of Federal Employment Taxes and Income Tax Withholding,” should be filed with the IRS. Form UITA-9, “Worker Relationship Questionnaire,” should be filed with the

For more information visit www.colorado.gov/cdle.