Employee vs. Independent Contractor: IRS Factors

by benbunker on June 7, 2011

Employee vs. Independent Contractor

small business considerations for independent contractors

For many new and current small business owners, it is common to prefer independent contractors over employees for tax purposes and simplicity of record keeping. However, the IRS has become more vigilant when evaluating whether someone is an employee or an independent contractor. Here are some important factors that the IRS looks at when determining whether someone is an employee or an independent contractor:

(1) Instruction: The IRS contends that a person who is required to comply with instructions about when, how or where he/she is to work is generally an employee;

(2) Training: The IRS contends that an employer generally trains an employee as to its methodologies and practices and that an independent contractor generally has his or her own style and does not require training;

(3) Integration: The IRS contends that integration of a worker’s services into the business operations generally shows that he or she is subject to direction and control and is an employee;

(4) Services Rendered Personally: The IRS contends that if the services must be rendered personally, presumably the employer is interested in the methods, as well as the results and the worker is more likely to be an employee;

(5) Hiring, Supervising, and Paying Assistants: The IRS contends that hiring, supervising and paying assistants by the employer generally shows control over persons on the job and indicates and employment relationship;

(6) Continuing Relationship: The IRS contends that continuing a relationship between an individual and the person for whom he/she performs services is a fact that an employment relationship exists;

(7) Set Hours of Work: The IRS contends that set hours of work is a factor indicating an employment relationship;

(8) Full-Time Required: The IRS contends that if a worker must devote his/her full time to the business of the Taxpayer and/or if the Taxpayer has control over the amount of time the worker spends working there, it’s an indication that an employment relationship exists;

(9) Doing Work on Taxpayer Premises: The IRS contends that doing work on the Taxpayer’s premises implies that the Taxpayer has control and indicates an employment relationship exists;

(10) Order or Sequence Set: The IRS generally contends that if a person must perform services in the order or sequence set for him/her by the Taxpayer, it shows that the worker is not free to follow his/her own pattern of relationship;

(11) Oral or Written Report: The IRS contends that another element of control reflecting an employment relationship is the requirement to submit regular oral or written reports to the Taxpayer;

(12) Payment by Hour, Week, Month: Unless facts indicate otherwise, the IRS contends that payment by the hour, week or month generally indicates an employer-employee relationship. Independent Contractors are paid by the job, not by time.

Employee or Independent Contractor: Know Which is Which
Prior to starting a small business, make sure you are clear on the status of those working for your. The IRS can make life miserable for you if they have to dig into this issue. Even if you currently have a small business, re-evaluate the status of your workers to make sure you comply with the IRS’ requirements.

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