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Determining the level of control you have over your workers is the key to resolving the issue of whether your workers are employees, for whom you have payroll tax obligations, or independent contractors, for whom you do not. When IRS auditors analyze this issue, they work through a list of 20 different factors before concluding whether a sufficient level of control is present to create an employer-employee relationship. You should go through this same exercise before you try to claim that someone who does work for you is an independent contractor and not your employee.
As you work through the list, keep in mind that the importance of each factor will vary depending on the type of work being done and the circumstances of your own particular case. Because this is a rather subjective analysis, your goal should be to honestly assess how great a risk you'll be taking if you plan to treat a worker as an independent contractor. In close cases, talk to your tax professional or request an IRS determination of the worker's status. That being said, here are the 20 factors:
- Instructions. Workers who must comply with your instructions as to when, where, and how they work are more likely to be employees than independent contractors.
- Training. The more training your workers receive from you, the more likely it is that they're employees. The underlying concept here is that independent contractors are supposed to know how to do their work and, thus, shouldn't require training from the purchasers of their services.
- Integration. The more important that your workers' services are to your business's success or continuation, the more likely it is that they're employees.
- Services rendered personally. Workers who must personally perform the services for which you're paying are more likely employees. In contrast, independent contractors usually have the right to substitute other people's services for their own in fulfilling their contracts.
- Hiring assistants. Workers who are not in charge of hiring, supervising, and paying their own assistants are more likely employees.
- Continuing relationship. Workers who perform work for you for significant periods of time or at recurring intervals are more likely employees.
- Set hours of work. Workers for whom you establish set hours of work are more likely employees. In contrast, independent contractors generally can set their own work hours.
- Full time required. Workers whom you require to work or be available full time are likely to be employees. In contrast, independent contractors generally can work whenever and for whomever they choose.
- Work done on premises. Workers who work at your premises or at a place you designate are more likely employees. In contrast, independent contractors usually have their own place of business where they can do their work for you.
- Order or sequence set. Workers for whom you set the order or sequence in which they perform their services are more likely employees.
- Reports. Workers whom you require to submit regular reports are more likely employees.
- Payment method. Workers whom you pay by the hour, week, or month are more likely employees. In contrast, independent contractors are usually paid by the job.
- Expenses. Workers whose business and travel expenses you pay are more likely employees. In contrast, independent contractors are usually expected to cover their own overhead expenses.
- Tools and materials. Workers whose tools, materials, and other equipment you furnish are more likely employees.
- Investment. The greater your workers' investment in the facilities and equipment they use in performing their services, the more likely it is that they're independent contractors.
- Profit or loss. The greater the risk that your workers can either make a profit or suffer a loss in rendering their services, the more likely it is that they're independent contractors.
- Works for more than one person at a time. The more businesses for which your workers perform services at the same time, the more likely it is that they're independent contractors.
- Services available to general public. Workers who hold their services out to the general public (for example, through business cards, advertisements, and other promotional items) are more likely independent contractors.
- Right to fire. Workers whom you can fire at any time are more likely employees. In contrast, your right to terminate an independent contractor is generally limited by specific contractual terms.
- Right to quit. Workers who can quit at any time without incurring any liability to you are more likely employees. In contrast, independent contractors generally can't walk away in the middle of a project without running the risk of being held financially accountable for their failure to complete the project.