Employee or Independent Contractor?

Whether someone who works for you is an employee or an independent contractor is an important question. The answer determines your liability to pay and withhold Federal income tax, social security and Medicare taxes, and Federal unemployment tax.
In general, someone who performs services for you is your employee if you can control what will be done and how it will be done.

The courts have considered many facts in deciding whether a worker is an independent contractor or an employee. These facts fall into three main categories:

1. Behavioral Control – Facts that show whether the business has a right to direct and control. These include...http://www.irs.gov/govt/fslg/article/0,,id=110344,00.html
2. Financial Control – Facts that show whether the business has a right to control the business aspects of the worker’s job include...http://www.irs.gov/govt/fslg/article/0,,id=110344,00.html
3. Type of Relationship – Facts that show the type of relationship include...http://www.irs.gov/govt/fslg/article/0,,id=110344,00.html

For a worker who is considered your employee, you are responsible for:
Withholding Federal income tax,
Withholding and paying the employer social security and Medicare tax,
Paying Federal unemployment tax (FUTA)
Issuing Form W-2, Wage and Tax Statement, annually,
Reporting wages on Form 941, Employer’s Quarterly Federal Tax Return.
For a worker who is considered an independent contractor, you may be responsible for issuing Form 1099-MISC, Miscellaneous Income, to report compensation paid.
The status of certain workers is specifically determined by law; these workers are known as statutory employees and statutory non-employees. See Publication 15-A, Employer’s Supplemental Tax Guide, for more information.
If you would like for the IRS to determine whether or not a worker is considered an employee, please submit Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.