Independent Contractors--How to Classify Workers
One of the steps we recommend to clients who use independent contractors and who therefore face a heightened risk of a costly IRS payroll tax or benefits audit, is a quick review of some of the key things the IRS tells its agents to look at in determining whether a worker is really an employee.
The primary inquiries fall into three categories. Who has financial control of the job? Who can exercise control over how the worker performs the specific task? And how do the parties themselves view the relationship? When reviewing the checklist, keep in mind that the IRS will make its decision based on the whole picture, not just a single factor.
Workers are more likely to be classified as independent contractors if they:
lMake a significant investment in business property (a home computer is not significant);
lPay their own business expenses;
lReceive a flat fee that is not based on an hourly or similar rate;
lAre not prohibited from doing work for other companies;
lCan pay subcontractors to get the job done;
lAre not performing services as an integral part of your regular business;
lHave a contract with an enforceable liquidated damages provision;
lCan make a profit;
lCan suffer a loss.
Workers are more likely to be classified as employees if they:
lAre given specific instructions and on-going training in how to get the work done;
lCannot work for others;
lHave expenses paid by your company;
lAre paid with a salary or hourly wage;
lDo not have a significant investment in their trade or business;
lAre an integral part of your regular business;
lReceive direct reimbursement for all, or almost all, expenses;
Less important is:
lWhether or not the work is performed on the business's premises;
lWhether the worker has flexibility in setting hours;
lWhether the relationship is temporary or short-term;
lWhether the work is full- or part-time;
lWhether the worker performs services for one or more businesses.
If you suspect from this list that there might be a problem, we would be happy to come in and do an audit of your hiring practices and suggest effective solutions if necessary.