From the Monterey Herald —
The determination of whether a worker is an independent contractor or an employee is based on common law rules. The determination depends primarily on the extent to which you have the right to direct and control the worker with regard to what is to be done, how it is to be done and when it is to be done. An employer generally has the right to control how and when an employee performs the service. Independent contractors generally determine how and when the work is to be performed.
The Internal Revenue Service has developed guidelines falling into three categories to help discern the degree of control and independence for the purpose of determining employee or independent contractor status: behavioral control, financial control and the type of relationship of the parties (contractual, benefit package, etc.).
The exposure for misclassifying an employee as an independent contractor can be substantial. In addition to the state unemployment insurance and state withholding taxes, you will be responsible for the employer’s share of Social Security and Medicare taxes plus a percentage of the federal withholding taxes and employee’s share of Social Security and Medicare taxes that should have been withheld, plus interest and penalties. If the IRS determines that you intentionally misclassified your workers, or did not file Forms 1099-Misc, your exposure will be even greater!….
Read the full story Barry Dolowich, Tax Tips: Employee vs. independent contractor