Have You Ever Wondered If You Have Properly Classified: Employee vs. Independent Contractor

A person working for a business as an employee or independent contractor is a very important classification. If you think you ultimately make that decision, it is in actuality the IRS. The real question is how and when?

In the event of an IRS audit of your business, an unemployment claim filed by a former worker, worker’s compensation benefit claim filed by a worker, a former contractor filing a Form SS-8 (Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding) to mention a few.

Next question is what happens when theĀ  classification of Independent Contractor is changed to Employee? The employer now becomes responsible for both the employer’s and employee’s FICA, FUTA and federal income tax. The IRS could bring in the state as well. The employer may face a penalty equal to the amount of back taxes owed as well as interest from due dates.

The following is a list of twenty questions the IRS uses to determine if a worker is an independent contractor or employee. The answer “yes” to any of these (with the exception of #16) may mean the worker is an employee.

  1. Is the worker required to comply with instructions about when, where and how the work is done?
  2. Is the worker provided training that would enable him/her to perform a job in a particular method or manner?
  3. Are the services provided by the worker an integral part of the business’ operations?
  4. Must the services be rendered personally?
  5. Does the business hire, supervise or pay assistants to help the worker on the job?
  6. Is there a continuing relationship between the worker and the person for whom the services are performed?
  7. Does the recipient of the services set the work schedule?
  8. Is the worker required to devote his/her full time to the person he/she performs services for?
  9. Is the work performed at the place of business of the company or at specific places set by the company?
  10. Does the recipient of the services direct the sequence in which the work must be done?
  11. Are regular oral or written reports required to be submitted by the worker?
  12. Is the method of payment hourly, weekly, monthly (as opposed to commission or by the job)?
  13. Are business and/or traveling expenses reimbursed?
  14. Does the company furnish tools and materials used by the worker?
  15. Has the worker failed to invest in equipment or facilities used to provide the services?
  16. Does the arrangement put the person in a position of realizing either a profit or loss on the work?
  17. Does the worker perform services exclusively for the company rather than working for a number of companies at the same time?
  18. Does the worker in fact make his/her services regularly available to the general public?
  19. Is the worker subject to dismissal for reasons other than non-performance of the contract specifications?
  20. Can the worker terminate his/her relationship without incurring a liability for failure to complete the job?

These are all questions a PEO like ERA can help you answer and correctly submit.