Are They Really Independent Contractors?
September 03, 2014
This is a drum worth beating, especially in light of the upcoming employer mandates from the Affordable Care Act that are scheduled to go online in 2015. You can bet that enforcement in this area of the law by the IRS will increase in the upcoming years.
Employers may be tempted to classify workers as independent contractors/freelancers as opposed to full-time employees. Doing so eliminates the cost of company benefits such as vacation, sick pay, health insurance and retirement funding. It also eliminates the employer’s matching share of Social Security and Medicare payroll taxes, not to mention saving on unemployment taxes and worker’s compensation insurance.
However, traveling down this road requires the utmost of caution. Just designating and then paying a worker like an independent contractor does not necessarily make him one. And if you are subsequently challenged on that classification by the IRS or your state taxing authority and lose, you’ll probably have to pay back all those savings plus penalties and interest. The company’s retirement plan could also be in jeopardy of losing its qualifying status if workers who should have been eligible to participate were excluded from the plan.
The line between independent contractor and employee is not always clear; the following are some guidelines that can be used in making the determination.
The three primary characteristics the IRS uses to determine the relationship between businesses and workers are: Behavioral Control, Financial Control and the Type of Relationship.
- Behavioral Control – Relates to facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
- Financial Control – Relates to facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.
- Type of Relationship – Relates to how the workers and the business owner perceive their relationship. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees. If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.
Here are some additional factors to consider when making a determination:
- Sole Employer – An independent contractor is in business for him or herself and generally will have additional clients for whom services are provided. If you are the only client and he or she is not actively pursuing work from others, then it becomes an indicator favoring employee status.
- Work Schedule – Independent contractors generally set their own work schedule. Requiring the worker to maintain regularly scheduled work hours is an indicator of employee status.
- Materials & Supplies – Independent contractors generally provide their own materials and equipment and invoice their clients for labor and materials. If you provide all of the material and supplies, that is another indicator of employee status.
- Work Location – Another indicator of employee status is when a worker performs services only at your work location and does not maintain an office or facilities elsewhere.
- Assistance – If the independent contractors uses your employees to assist in his work and does not have employees of his own, this may indicate a lack of independent contractor status.
Lastly, if you want a fighting chance in your classification battle with the IRS or your state authorities, please ensure that you are in compliance with Form 1099 filings. If 1099s are not properly filed for unincorporated independent contractors providing $600 or more in services, your position will not have much traction.