Does it matter if you declare and pay an employee like a contractor?

Whether or not a person serves as a contractor or an employee of your business can be a tricky area of employment law in New Mexico or any other state in which your company may do business or contract help within. There are a number of factors which may help determine the best option for your business, and certainly some pitfalls to avoid in making that decision.

Who does it matter to?

The IRS and the New Mexico Taxation & Revenue Department may take a large interest in employee classifications of contractors versus employees as it impacts how taxes are paid by businesses and workers. The U.S. Small Business Administration lists several potentially costly ramifications for the incorrect listing of an employee as a contractor for tax purposes such as having to pay back taxes and penalties on the employee including Social Security, Medicare, and unemployment.

Additionally, the worker may be owed a number of items due to employees that are absent for independent contractors. An employee may qualify for retirement programs, health insurance, and even wage reimbursement such as overtime under the U.S. Fair Labor Standards Act. Actions, such as workers compensation qualified events, which may have occurred in the workplace during the mistaken designation as a contractor could also complicate matters for the employer.

Is the worker a contractor or employee?

For the purposes of unemployment insurance benefits and taxation, there are a number of factors which may be considered in classifying an employee. The IRS recommends part of that analysis should involve examining three major categories.


Behavioral factors are the first step in that process and include asking questions such as: who controls when, how, and exactly what the worker does in the pursuit of accomplishing the employer’s reason for contracting with that worker. For example: If someone were hired to repair a piece of equipment by a certain date, would an employer be more likely to care about the worker doing so at midnight versus normal business hours and, if so, is it for a practical reason or to maintain regular hours on the job?


Another category involves financial considerations in certain aspects of the actual work taking place as well as from a human resources standpoint. Some pertinent financial examples are: Can the worker freely advertise the same services to other potential clients/employers and who has ownership or control over tools used to complete the job?

Worker benefits

Other relationship factors are a third broad category with evidence such as whether or not the worker receives benefits such as paid vacation or sick time and the permanence of the relationship between the business and the worker. Sometimes a contract or written agreement can also include language which would suggest more strongly employee or contractor.

These examples are just a few of the many factors which may need to be analyzed by a business depending on their worker situation. New Mexico businesses may find a higher level of comfort by using experienced legal counsel for the decision to designate workers as contractors or employees, and any contract drafting or future defense matters involving such decisions.