|
It’s critical for an enterprise periodically to review the
status of its workers and see if they are properly classified.
An enterprise must withhold federal income tax, social security
taxes, and federal unemployment taxes on wages it pays workers
who are employees. It also may have to provide them with the
same fringe benefits and retirement plan coverage available
to its other employees. There may be state tax obligations
as well. By contrast, these responsibilities don’t apply for
workers who are independent contractors. The business simply
cuts them a check for their services and sends them a Form
1099-MISC.
Under the “common law” rules developed by the courts,
a worker generally is an employee for federal tax purposes
if the employer has the right to control and direct the worker
regarding the job he is to do and how he is to do it. The
employer doesn’t have to actually direct or control how
the services are performed; it’s enough if the employer
has the right to do so. IRS usually applies the following
factors to see if the employer has the right to direct and
control the worker:
 A
worker who must comply with instructions about when, where,
and how he or she is to work is ordinarily an employee. This
control factor is present if the business has the right to
make the worker follow instructions. However, instructions
regarding government standards are given little weight, as
is the absence of instructions for professionals, such as
attorneys, who must follow the rules of their profession.
Training
a worker by teaming an experienced employee with the worker,
by corresponding with the worker, by requiring him or her
to attend meetings, or by using other methods, indicates the
business wants the services performed in a particular method
or manner. Ongoing training is a particularly strong sign
of an employer-employee relationship, but orientation or information
programs about company policies aren’t.
Integration
of the worker’s services into the business operations
generally shows the worker is subject to direction and control.
If
the services must be rendered personally, the business probably
is interested in the methods used to accomplish the work as
well as in the results.
A
business that hires, supervises, and pays assistants for a
worker is exhibiting employer-like control over the worker
on the job. Conversely, an independent contractor relationship
is indicated if a worker is contractually obligated to hire,
supervise, and pay assistants.
A
continuing relationship between the worker and the business
indicates an employer-employee relationship exists. A continuing
relationship may exist where the worker is called in at frequently
recurring, although irregular, intervals.
|
The
fact that a business requires work to be performed on its
premises suggests control over the worker (if the work could
be done elsewhere). Work done off the premises, such as at
the worker’s office, indicates some freedom from control.
The importance of this factor depends on the type of services
involved and whether an employer generally would require employees
to do similar work on its premises.
A
business exhibits control over a worker if it requires him
or her to perform services in a specific order or sequence.
A
business’s requirement that the worker submit regular
or written reports indicates a degree of control over the
worker.
Payment
by the hour, week, or month generally points to an employer-employee
relationship, if this method of payment isn’t just a
convenient way of paying a lump-sum agreed upon as the cost
of a job. Payment by the job or on a straight commission basis
generally indicates a worker is an independent contractor.
A
business exhibits characteristics of an employer if it supplies
a worker with significant tools, materials, and other equipment,
or ordinarily pays the worker’s business and/or traveling
expenses.
A
worker exhibits independent contractor status if he or she
invests in facilities that aren’t typically maintained
by employees (e.g., renting his or her own office). By contrast,
an employee usually relies on the employer to provide the
facilities needed to do the job.
A
worker who can realize a profit or suffer a loss as a result
of his or her services generally is an independent contractor,
but a worker who can’t is an employee. The risk that
a worker won’t be paid isn’t factored in.
A
worker who performs more than minimal services for a number
of unrelated businesses at the same time generally is an independent
contractor. However, a person who works for more than one
business may be an employee of each business, especially where
the businesses are part of the same service arrangement.
The
fact that a worker makes his or her services available to
the general public on a regular and consistent basis indicates
an independent contractor relationship.
The
right to fire a worker is a factor indicating that he or she
is an employee. An independent contractor on the other hand,
can’t be fired as long as he or she produces the work
that was contracted-for.
There is no litmus test for exactly how many
of these factors must be satisfied, nor are these factors
uniformly applied.
|
