Employee or Independent Contractor?
Understanding the Employment Relationship Between You and Your Workers
All employers doing business in Pennsylvania must understand that under the Pennsylvania Unemployment Compensation, or UC law, for benefit and tax purposes, the term "employee" is presumed to apply to every individual who performs services for which he or she is paid. Unless specifically excluded from coverage, all work for which payment is made under any contract of hire, express or implied, written or oral, including work performed in interstate commerce or as an officer of a corporation, is covered by the UC Law.
Services performed by a worker will be exempt under the benefit and taxing provisions of the UC Law if the individual is an "independent contractor." To be excluded from coverage, the individual who performs the services must meet two conditions pursuant to Section 4(l)(2)(B):
The individual has been and will continue to be free from control or direction over the performance of the services involved, both under his or her contract of service and in fact, and
As to these services, the individual is customarily engaged in an independently established trade, occupation, profession or business.
Only if both of these conditions are met to the satisfaction of the department will the individual be regarded as an "independent contractor." Unless and until those criteria are met, the services will be "employment" subject to the coverage of UC law.
If an individual performs services in the construction industry, the individual will be designated as an independent contractor only if he or she (1) has a written contract to perform such services, (2) is free from direction or control over performance of the services both under the contract of service and in fact, and (3) is customarily engaged in an independently established trade, occupation, profession or business. To be customarily engaged in an independently established trade, occupation, profession or business, the individual must:
possess the essential tools, equipment and other assets necessary to perform the services independent of the person for whom the services are performed
realize a profit or suffer a loss as a result of performing the services
perform the services through a business in which the individual has a proprietary interest
maintain a business location that is separate from the location of the person for whom the services are being performed
have previously performed the same or similar services for another person while free from direction or control over performance of the services both under the contract of service and in fact, or the individual holds himself out to another person as available and able, and in fact is available and able, to perform the same or similar services while free from direction or control over performance of the services
maintain liability insurance during the contract term of at least $50,000
The following factors are not conclusive in determining "independent contractor" status:
employer designation, either verbally or in writing, that an individual is an "independent contractor"
statement by an individual that he or she is an "independent contractor"
issuance of a Federal Form 1099
A written agreement between a worker and the worker's employer does not control the worker's status. Pennsylvania's UC law requires an examination of the facts to determine if the worker is an independent contractor. Whether the services are performed on a full-time or part-time basis is immaterial to an individual's employment status.
An investigation into an individual's employment status may occur in connection with a UC claim filed by an individual who asserts that he or she was an employee rather than an "independent contractor." Also, the Office of Unemployment Compensation Tax Services randomly selects employers for audit to verify compliance with UC law.
Employers should maintain sufficient documentation to support the reasons for classifying any individual as an "independent contractor." Examples of relevant documentation include: copies of the individual's preprinted invoices, business forms and stationery, federal and state tax ID numbers, business telephone directory listings, public advertisements soliciting business, articles of incorporation and leases on business properties. The department will use all available information to determine a worker's status.
Any questions concerning employer/employee relationships should be directed to the nearest Field Accounting Service Office in your area. A list of these offices can be found at:
Click "Services Near You" in the lower right-hand corner, then click the nearest county and scroll down to the office providing UC employer tax services.
Auxiliary aids and services are available upon request to individuals with disabilities.
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