Are Your Independent Contractors Really Employees?
In order to avoid the substantial expenses incurred by employers when hiring employees, such as matching tax contributions and benefits, most employers in this era of full employment are attempting to create independent contractor relationships with their employees. In most instances, that is like fitting a square peg in a round hole.
The IRS has certain tests they apply to the relationship in order to determine whether it is truly one of an independent contractor. Businesses should be wary of independent contractor status since many workers prefer it, it can create a great deal of controversy.
The IRS typically looks at several core factors to determine whether your independent contractor is, in fact, an independent contractor and not an employee. A select group of those factors are on the Chart as follows:
|Must comply with employer’s instructions regarding when, where and how to perform tasks.||Determines place and sequence of work.|
|Trained by employer.||Train on their own.|
|Employee does the work.||Anyone can do the work so long as the contract is fulfilled.|
|Employer hires assistants.||Assistants hired by contractor.|
|Employer sets work hours.||Contractor works whenever they choose.|
|Expenses paid by employer.||Contractor pays their own business and travel expenses.|
|Work performed on site.||Contractor generally works off site.|
|Employee’s services are not generally available to someone else.||Contractor’s services are available to others.|
|Maintains continuous relationship with the employer.||Works by the task or job contracted.|
|Paid by the hour or salaried.||Independent contractor is paid by the job.|
|Employer provides tools and equipment.||Uses their own tools.|
|No profit enjoyed or loss suffered.||Can make a profit or suffer a loss.|
|Can be fired at any time||Cannot be fired if performance satisfies the contract.|
|Employee can quit the job without liability.||Contractor required to complete the job according to the contract specifications.|
As you can see, there are specific guidelines which must be followed in order to avoid a challenge from the IRS that your independent contractors are nothing more than employees. Your failure to adhere to these guidelines could result in a large assessment of penalties and back taxes. All it takes is one disgruntled employee or purported independent “contractor” to turn what you thought would be a lifesaver into a loser. Take the time now to evaluate your independent contractor relationships to make sure they are not employees in disguise. Better yet, review your independent contractor agreement to make sure that in the future you do not run afoul of the guidelines set forth above.