Independent Contractor vs. Employee

Both the IRS and State taxing agencies are aggressively looking at the issue of sub contract labor.  If you use sub contractors in your business the following will be of interest to you.

The primary audit inquiries fall into three categories. Who has financial control of the job? Who can exercise control over how the worker performs the specific task? And how do the parties themselves view the relationship? When reviewing the checklist, keep in mind that the IRS will make its decision based on the whole picture, not just a single factor.

Workers are more likely to be classified as independent contractors if they:

  • Make a significant investment in business property, such as tools;
  • Pay their own business expenses;
  • Receive a flat fee that is not based on an hourly or similar rate;
  • Are not prohibited from doing work for other companies;
  • Can pay subcontractors to get the job done;
  • Are not performing services as an integral part of your regular business;
  • Have a contract with an enforceable liquidated damages provision;
  • Can make a profit;
  • Can suffer a loss. 

    Workers are more likely to be classified as employees if they:

  • Are given specific instructions and on-going training in how to get the work done;
  • Cannot work for others;
  • Have expenses paid by your company;
  • Are paid with a salary or hourly wage;
  • Do not have a significant investment in their trade or business;
  • Are an integral part of your regular business;
  • Receive direct reimbursement for all, or almost all, expenses; 

    Other factors are:

  • Whether or not the work is performed on the business’s premises;
  • Whether the worker has flexibility in setting hours;
  • Whether the relationship is temporary or short-term;
  • Whether the work is full- or part-time;
  • Whether the worker performs services for one or more businesses.
  •  

    If sub contractors are reclassified as employees the results can be financially devastating.

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