Independent Contractor or Employee?

IRS Rules have been fined tuned in recent years clarifying the difference between Independent Contractors and Employees.  The IRS breaks it down into three categories of “Common Law Rules” that need to be considered when providing evidence of the degree of control of the company and independence of the contractor.

Its important to understand the elements in these categories which I highlight below.

Behavioral Control Highlights

  • You cannot give certain types of instructions such as what tools to use, who they should hire, where to purchase supplies and equipment, what order or sequence to follow when preforming work, etc.
  • You have to be careful about the degree of instruction you give to them.
  • You should not provide training on how they should do the job.
  • You should not evaluate the work performance that measures the details of how the work is performed.

Financial Control Highlights

  •  They should have their own  equipment and tools.
  •  They should be paid a flat weekly or monthly fee.
  •  They are free to offer their services to other organizations.
  •  They are likely to have unreimbursed expenses in connection with their services.
  •  They have an opportunity to make a profit or the possibility to suffer a loss in connection with providing their services.

Type of Relationship Highlights

  •  You will need a written contract that clearly states how you will work together.
  •  You cannot provide them employee benefits.
  •  The relationship should not be something that is expected to continue indefinitely.
  •  The services they provide must be the key activity of their business.

 

All these factors must be considered and some may apply and some may not. The key is to consider the entire relationship between the company and “contractor/employee” and the degree to which the company directs and controls the work. Once that is determined, you need to document each of the factors that are used to make the decision. If the determination is unclear,  a Form SS-8 must be filed with the IRS who will review the information and make an official determination  – which will take at least six months to complete.

There are also tax obligations that need to be considered and serious consequences of misclassifying and treating an employee as an independent contractor.