Topic of the Week Are you really an independent contractor?
What factors are important to the IRS in determining independent contractor status?
- Behavior control
- Financial control
- Type of relationship
Under IRS rules, workers are presumed to be employees. The burden is on the employer to prove that a worker is an independent contractor and not an employee. The IRS has recently simplified their previous list of 20 factors into a 3 category evaluation system to determine whether a worker is an employee or an independent contractor.
These 3 categories: (A)Behavioral Control, (B) Financial Control, and (C) Type of Relationship, include a total of 13 factors. The importance of each factor depends on your particular situation. These categories are detailed below:
Type of Instructions Given: Employees must follow the instructions of the employer as to when, where, and how to perform the work. Independent contractors can set their own hours and decide how to perform the job or complete the project. The company will review the finished project.
Degree of Instruction: Degree of Instruction means that the more detailed the instructions, the more control the business exercises over the worker and the closer the worker is to an employee. Less detailed instructions reflect less control, indicating that the worker is more likely an independent contractor.
Evaluation: If an evaluation system measures the details of how the work is performed, then these factors would indicate that you are an employee. If the evaluation system measures just the end result, then you could be either an independent contractor or an employee.
Training: The employer may hold classes, meetings or closely supervise on-the-job to train employees. Independent contractors can perform the work as they choose.
Significant Investment: Employees do not invest in the facility and do not buy equipment. Independent contractors must invest in their own workplace and equipment.
Unreimbursed Expenses: Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business.
Opportunity for Profit or Loss: The profit or loss of the company does not change the pay that employees earn. Independent contractors can profit or lose money based on good or bad results and time spent working on the project.
Services Available to the Market: Employees generally serve one employer. Independent contractors can provide services to the general public, advertise services, and recruit new customers--all while working for one or more other companies.
Method of Payment: Employees are paid on specific dates in regular amounts, and may be reimbursed for travel and business expenses. The contract between the company and the independent contractor determines how payment is to be made. Independent contractors may include expenses as part of the contract or may pay expenses independently.
Type of Relationship:
Written Contract: Although a contract may state that the worker is an employee or an independent contractor, this is not sufficient to determine the worker's status. The IRS is not required to follow a contract stating that the worker is an independent contractor, responsible for paying his or her own self-employment tax. How the parties work together determines whether the worker is an employee or an independent contractor.
Employee Benefits: Employee benefits include things like insurance, pension plans, paid vacation, sick days, and disability insurance. Businesses generally do not grant these benefits to independent contractors. However, the lack of these types of benefits does not necessarily mean the worker is an independent contractor.
Permanency of the Relationship: Employees have an ongoing relationship with the employer. Independent contractors are hired for a specific job. When that job is finished, the working relationship ends.
Services Provided as Key Activity of the Business: If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney's work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.