If your business has employees, you are subject to the Texas Unemployment Compensation Act (TUCA). You may be liable to pay unemployment taxes on wages you pay to your employees. You do not pay unemployment taxes on independent contractors.
However, if you misclassify your employees as independent contractors, it could result in more costs. Costs would include increased taxes, penalties, and interest charges.
The TUCA Section 201.041 defines who is an employee.
The law defines employment as a service performed by an individual for wages under an express or implied contract for hire, unless it is shown to the satisfaction of the Commission that the individual’s performance of the service has been and will continue to be free from control or direction under the contract.
The definition of employment includes three elements:
- Direction and control
The law does not require you to exercise direction and control. Direction and control would still exist even if you do not exercise it. You only need to have the right to do so.
If your worker meets this definition, they are your employee.
TWC uses a 20-point guide to determine if a worker is an employee or an independent contractor. See Employment Status – A Comparative Approach.
Under the common law test, a worker is an employee if the purchaser of that worker's service has the right to direct or control the worker, both as to the final results and as to the details of when, where, and how the work is done. Control need not actually be exercised; rather, if the service recipient has the right to control, employment may be shown.
Depending upon the type of business and the services performed, not all of the twenty common law factors may apply. In addition, the weight assigned to a specific factor may vary depending upon the facts of the case.
If an employment relationship exists, it does not matter that the employee is called something different, such as: agent, contract labor, subcontractor, or independent contractor.
The 20 Common Law Factors are as follows:
An Employee receives instructions about when, where and how the work is to be performed.
An Independent Contractor does the job his or her own way with few, if any, instructions as to the details or methods of the work.
Employees are often trained by a more experienced employee or are required to attend meetings or take training courses.
An Independent Contractor uses his or her own methods and thus need not receive training from the purchaser of those services.
Services of an Employee are usually merged into the firm's overall operation; the firm's success depends on those Employee services.
An Independent Contractor's services are usually separate from the client's business and are not integrated or merged into it.
Services Rendered Personally
An Employee's services must be rendered personally; Employees do not hire their own substitutes or delegate work to them.
A true Independent Contractor is able to assign another to do the job in his or her place and need not perform services personally.
Hiring, Supervising & Paying Helper
An Employee may act as a foreman for the employer but, if so, helpers are paid with the employer's funds.
Independent Contractors select, hire, pay and supervise any helpers used and are responsible for the results of the helpers' labor.
An Employee often continues to work for the same employer month after month or year after year.
An Independent Contractor is usually hired to do one job of limited or indefinite duration and has no expectation of continuing work.
Set Hours of Work
An Employee may work "on call" or during hours and days as set by the employer.
A true Independent Contractor is the master of his or her own time and works the days and hours he or she chooses.
Full Time Required
An Employee ordinarily devotes full-time service to the employer, or the employer may have a priority on the Employee's time.
A true Independent Contractor cannot be required to devote full- time service to one firm exclusively.
Location Where Services Performed
Employment is indicated if the employer has the right to mandate where services are performed.
Independent Contractors ordinarily work where they choose. The workplace may be away from the client's premises.
Order or Sequence Set
An Employee performs services in the order or sequence set by the employer. This shows control by the employer.
A true Independent Contractor is concerned only with the finished product and sets his or her own order or sequence of work.
Oral or Written Reports
An Employee may be required to submit regular oral or written reports about the work in progress.
An Independent Contractor is usually not required to submit regular oral or written reports about the work in progress.
Payment by the Hour, Week or Month
An Employee is typically paid by the employer in regular amounts at stated intervals, such as by the hour or week.
An Independent Contractor is normally paid by the job, either a negotiated flat rate or upon submission of a bid.
Payment of Business & Travel Expense
An Employee's business and travel expenses are either paid directly or reimbursed by the employer.
Independent Contractors normally pay all of their own business and travel expenses without reimbursement.
Furnishing Tools & Equipment
Employees are furnished all necessary tools, materials, and equipment by their employer.
An Independent Contractor ordinarily provides all of the tools and equipment necessary to complete the job.
An Employee generally has little or no investment in the business. Instead, an Employee is economically dependent on the employer.
True Independent Contractors usually have a substantial financial investment in their independent business.
Realize Profit or Loss
An Employee does not ordinarily realize a profit or loss in the business. Rather, Employees are paid for services rendered.
An Independent Contractor can either realize a profit or suffer a loss depending on the management of expenses and revenues.
Working for More Than One Firm at a Time
An Employee ordinarily works for one employer at a time and may be prohibited from joining a competitor.
An Independent Contractor often works for more than one client or firm at the same time and is not subject to a non-competition rule.
Making Service Available to the Public
An Employee does not make his or her services available to the public except through the employer's company.
An Independent Contractor may advertise, carry business cards, hang out a shingle, or hold a separate business license.
Right to Discharge Without Liability
An Employee can be discharged at any time without liability on the employer's part.
If the work meets the contract terms, an Independent Contractor cannot be fired without liability for breach of contract.
Right to Quit Without Liability
An Employee may quit work at any time without liability on the Employee's part.
An Independent Contractor is legally responsible for job completion and, on quitting, becomes liable for breach of contract.
Employers are responsible for classifying workers correctly.
A worker who is called contract labor and whose wages are reported using IRS Form 1099 may not be an independent contractor. The form you use does not determine the correct worker classification. The correct worker classification determines which form you should use.
Even if you and your worker agree, you cannot classify an employee as an independent contractor. The terms of employment define whether a worker is an employee or an independent contractor. If service, wages and direction and control are present, the worker is your employee.
A written or oral agreement between you and your worker does not change an employee to an independent contractor.
Misclassifying a worker can cost your business in taxes and interest.
Misclassifying a worker can result in a fine. If you have a government contract, you could be charged $200 per misclassified worker.
Misclassifying workers raises unemployment tax rates for all Texas employers.
If you need help classifying your workers, contact your nearest TWC tax office.
If you have information that a business is misclassifying workers, please submit a Contact Request. From the Employer menu:
- Reason for Contact: Other Tax Issues
- Issue that you are having: Worker Misclassification
If you wish to remain anonymous, call us at 512-463-2700. Deaf, hard-of-hearing or speech impaired customers may contact Relay Texas: 1-800-735-2989 (TDD) and 711 (Voice).
Provide as much information as you can, including:
- Business name
- Name of the owner/officer
- Physical location of the business
- Type of workers that are being misclassified
Your request becomes part of the official record once TWC receives it. The identifiers inserted become part of the message. It cannot be removed from the record (Texas Penal Code Chapter 37). The accused has a right to review the official record under the Public Information Act. They will be able to obtain a copy of the record.