Independent Contractor or Employee
Independent Contractor or Employee - 20 Deterimining Factors
Many businesses would rather pay independent contractors (“contract labor”) than employees. This practice allows the company to avoid paying payroll taxes and to exclude the independent contractor from fringe benefit and retirement plans.
Many people would rather receive “contract labor” payments than wages, since this allows the person to deduct expenses in computing adjusted gross income they otherwise wouldn't be able to deduct.
The IRS has been focusing more attention recently on whether workers are correctly classified as independent contractors or employees. The IRS thinks many independent contractors (self-employed individuals) do not report all their income and/or over-state deductions on their tax returns. Also, the IRS believes more and more employers are trying to skirt paying payroll taxes and fringe benefits by classifying their workers as independent contractors when in fact they should be classified as employees. The IRS has a strong bias towards having workers classified as employees, because they have greater leverage over employers in collecting workers' taxes than they do over independent contractors, and they can collect other payroll taxes from employers as well. Also, the reporting requirements on employers make it easier for the IRS to make sure workers are reporting all of their income.
The following 20 factors can be used to determine the correct worker status, and to structure The workerr work arrangements and help prove The worker independent contractor status. These factors are the tests applied by the courts in determining employment status. No single factor is controlling, nor is any particular weight given to any one of the factors.
Behavioral Control Factors
These factors measure whether there is a right to direct or control how the work is done.
- The company gives few instructions about how, when and where the work is performed. The more instructions and control over how, when, and where work is performed, the more likely the relationship is and Employer/Employee relationship.
- How much training is provided by the company to the worker. The more training provided to do the job, the more likely the relationship is and Employer/Employee relationship.
- To what degree are the worker's services integrated with the company’s operations.
- Is the worker required to perform the services personally, or can they have someone else do the work.
- The worker can hire, supervise, and pay assistants.
- The relationship with the company is not continuing or is infrequently recurring.
- The worker sets their own working hours.
- The worker does not work full-time for the company.
- The worker does not work at the company’s location.
- The worker determines and sets the steps in which the work will be done.
- Is the worker required or not required to submit written or oral reports.
Financial Control Factors
These factors measure whether there is a right to direct or control how the business aspects of the worker’s activities are conducted. The more these factors apply, the more likely the relationship is that of an independent contractor / customer or client than it is an employer/employee relationship.
- The worker is paid by the job rather than by the week or month (time).
- The worker is not reimbursed for their business or traveling expenses.
- The worker provides own equipment, tools, and supplies.
- The worker invest in the facilities used for doing the work.
- The worker can realize a profit or suffer a loss as a result of their services.
- The worker performs services many different companies at the same time.
- The worker's services are available and advertised to the general public on a regular basis.
Relationship Factors
These factors measure how the parties perceive their relationship.
- The worker cannot be fired as long as the worker produces the requested work.
- The worker cannot terminate the worker relationship with the company until the worker's work is complete.
Here is an example of how these factors may be applied in determining whether the worker is an employee or an independent contractor. Jack is writing and implementing a marketing plan for ABC Company. Jack works 15 hours per week at ABC Company’s office for $40 per hour. Jack uses ABC Company’s computers, copiers, and phones. For the rest of the week, Jack serves a variety of other companies on a project-by-project basis. Under these circumstances, Jack may be an employee of ABC Company because Jack provides the services personally, works at ABC Company’s office, and uses ABC Company’s equipment. If ABC Company exercises any other degree of control over Jack's work, such as specifying the hours and days that Jack works, the relationship tends more toward that of employer/employee, and would be ruled that way by the IRS and the Tax Court.
If Jack wishes to be an independent contractor, he may want to restructure the work relationship. First, Jack might work at his own office rather than at ABC Company’s office. Second, Jack might use his own computer and equipment. Third, Jack might arrange to be paid on a project basis. Fourth, Jack might have a written agreement with ABC Company stating that he is an independent contractor engaged to perform a specific project for ABC Company, in this case, develop a marketing plan.