Determine if your Worker is an Employee or an Independent Contractor
This article contains the factors the IRS uses to decide – which you need to know
|Don’t Get Audited!|
As attorneys who represent small and medium-sized businesses in both transactional matters and disputes, we do our best to have a good idea of which issues are commonly encountered by our business clients -including contracts such as employment & independent contractor agreements. One situation which has become even more frequent over the last few years is the hiring of persons to work for the business in a non-traditional arrangement. Two reasons for this are the economic depression and how technological advances allow individuals to perform business tasks, often traditional ones, in new ways and in different settings. (As an example, I am dictating a draft of this article, to be transcribed by someone who does not work “in” my office. She will transcribe my dictation at her own location, using her own equipment and her own skills, and she will email it back to me more or less on her own schedule.)
While my example above does reflect an independent contractor relationship, many businesses mistakenly classify workers as independent contractors who are not, and the IRS is cracking down on these misclassifications. While filing your personal and business tax returns is necessary, you generally want to limit your interactions with the IRS and keep it as far away from your business as possible. Thankfully, our friends at the IRS have published plenty of material to help us mere mortals understand who is an independent contractor, and who isn’t. In fact, you can even make an inquiry of the Internal Revenue Service to ask them to make that determination for you (Form SS-8)! In case you don’t want to go quite that far, though, we’re glad to summarize below for you the factors the IRS focuses on in deciding if your worker is an independent contractor or an employee.
The IRS describes three categories of information it considers in making the I.C. vs. employee decision: behavioral control, financial control, and the relationship of the parties. Here are some of the key details the IRS analyzes in each category:
- when and where to do the work
- what tools or equipment to use
- what workers to hire or assist with the work
- where to purchase supplies and services
- what work must be performed by a specified individual
- what order or sequence to follow
- the extent of the worker’s non-reimbursed business expenses
- the extent to which the worker remains otherwise available for outside work
- how regular / guaranteed the worker’s pay from the business is
- the extent to which the work can realize a profit or a loss
Type of relationship:
- what any written contracts say about the nature of the relationship
- whether the business provides the worker with employee-type benefits
- how long / ongoing the relationship is
- the extent to which the worker is providing one of the business’ fundamental services
The bottom line is that the more control a business can exercise – or even more importantly – does exercise over a worker, the more likely it is that the worker is actually an employee as far as the IRS is concerned. Properly classifying your workers helps to keep the IRS where it should be – out of your way!
Disclaimers: the above is not legal advice, nor is it tax advice.