I hear this a lot: “Flor, I only pay independent contractors because is cheaper,” and yes! I agree it is less expensive as long as they really are what you say they are and not employees disguised as contractors.
Just because you pay 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 will pay back all those savings plus penalties and interest, Yikes!
I know the line between independent contractor and employee is not always clear, so here are some guidelines that can be used to determine.
The three primary characteristics the IRS uses to determine the relationship between businesses and workers are:
1. 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.
2. 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.
3. Type of Relationship – This factor relates to how the workers and the business owner perceive their relationship.
If you have the right to control or direct what is to be done and 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, not the means and methods of accomplishing the result, then your workers are probably independent contractors.
Here are some additional factors to consider when deciding:
- 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, it becomes an indicator favoring employee status.
- Work Schedule – Independent contractors generally set their work schedule. Requiring the worker to maintain regularly scheduled work hours indicates employee status.
- Materials & Supplies – Independent contractors generally provide their materials and equipment and invoice their clients for labor and materials. If you provide all of the materials 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 workplace and does not maintain an office or facilities elsewhere.
If, after considering all the factors and issues, you feel you cannot reach a definitive determination, then you, as an employer, can request the IRS to determine whether a specific individual is an independent contractor or an employee by filing a Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) with the IRS. However, the IRS does not issue determinations for proposed or hypothetical situations.
Please be aware that a worker may also file Form SS-8 requesting an IRS determination.
A word of caution: if a worker you classified as an independent contractor is subsequently determined to be an employee, you will be open to a lawsuit for back benefits or other demands related to the worker’s specific circumstances. In most cases! the savings you might have by misclassifying your employee will not be worth the trouble you could be in.
You can also find more information on publication 15-A on the IRS website: https://www.irs.gov/pub/irs-pdf/p15a.pdf.
Want to talk to me about your specific situation, Let’s have a chat!
Always in your corner,