One significant topic that consistently comes up….should an individual be classified as a contractor or an employee? Based on the IRS’ definition, the three aspects in determining whether an individual is a contractor or employee revolve around behavioral control, financial control, and relationship of the worker and firm. The IRS and other tax collecting agencies are auditing these classifications more frequently because the classification as an employee generally results in more income taxes by the employee and employer. The employment taxes, interest and penalties which may be assessed for incorrectly classifying an individual as a contractor will be significant. In addition, the misclassification of workers also opens the door to private causes of action from workers such as back pay, overtime pay, lost benefits and liquidated damages. The following is a brief outline of the factors that make up the three aspects:
Behavioral Control: - Do you train or instruct the worker? - Where does the individual perform services (onsite, offsite, etc)? - Does the individual work a fixed or variable amount of hours? - Can they hire for the company and who pays the hired individuals?
Financial Control: - Who provides equipment needed to perform work? - What expenses are incurred by the worker? - Is the pay fixed or variable based on other factors? - Does the firm carry workers compensation insurance for the individual? - Who has economic or financial risk?
Relationship of the Worker and Firm: - Does the worker receive benefits (i.e. Vacation, 401(K), etc)? - Does the worker provide services for other employers? - How does the firm represent the worker to customers?
There are often no bright lines in making your determination. For more guidance from the IRS, you can review the following link. If you wish to confirm a classification, you may request a free SS-8 determination letter from the IRS. If your company becomes the subject of an IRS audit, please contact us .