Tuesday

Independent Contractor vs. Employee per the IRS

In an effort to avoid paying workers compensation, FICA, Medicare and Unemployment taxes, many of my clients misclassify their workers as independent contractors and end up being audited and forced to pay back taxes on their employees as well as hefty penalties and interest.   This forces many small businesses out of business. 

When deciding if a worker should be classifed as an employee or independent contractor the IRS looks at 20 factors, as follows (if the questions are answered in the affirmative then the worker is an employee and not an independent contractor):

  1. Whether the party for whom a worker is performing services has the right to instruct the worker concerning the details of how the work is performed.
  2. Whether the employer provides training for the worker.
  3. Whether the worker's services are integrated into the employer's operation.
  4. Whether the worker must personally render the services.
  5. Whether the employer hires, supervises, and pays any  workers who assist the worker whose employment status is in question
  6. Whether the relationship between the worker and employer is continuing.
  7. Whether the worker must work set hours.
  8. Whether the worker must work full-time for the employer.
  9. Whether the worker must perform the services provided on the premises for the employer.
  10. Whether the work performed must be done in an order or sequence set by the party for whom the services are done.  
  11. Whether the worker must submit regular oral or written reports.
  12. Whether the worker is paid on an hourly, weekly, or monthly basis, rather than by the job or on commission.
  13. Whether the employer pays the worker's business or travel expenses.
  14. Whether the employer provides the worker with tools and materials necessary to do the work.
  15. Whether the worker has failed to invest in equipment or facilities used to provide the services.
  16. Whether either the worker or employer is free to terminate the relationship between them at any time.
Among the twenty factors, an affirmative answer to the following indicates the worker is an independent contractor and not and employee, as follows:

    17. Whether the worker has had  to make a significant investment in the facilities used in performing the agreed on work.
    18. Whether the worker can either realize a profit or suffer a loss as a result of the performance of the services as agreed.
    19. Whether the worker performs services for multiple parties that are not related to one another.
    20. Whether the worker's services are made available to the general public.  
        There you have it. If you are being audited or have already been audited give me a call.