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3 Jan

Employee or Independent Contractor? A Taxing Question

In today’s world of cutbacks, the role of employer and employee has become increasingly complex. Many individuals find themselves providing the same services they once did as traditional employees in increasingly less traditional working relationships as employers seek to reduce overall costs. As these roles change, many questions arise as to whether these new relationships are classed as independent contractors or employees.

In determining whether the person providing services is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. In the past, the IRS had used a 20 factor test in determining a worker’s status. This test has been condensed into three categories: Behavioral Control, Financial Control & Relationship Between the Parties.

Behavioral Control

Simply put this addresses which party controls, or has the right to control, what the worker does and how he/she does it. Factors to consider include:

  • Who directs when, where and how the work is to be done?
  • Who supplies the equipment, tools and materials?
  • Who has the authority to hire and fire additional help?
  • Who has the authority to direct where materials and services are purchased?

Financial Control

Who controls the basic business aspects of the worker’s job? Factors to consider include:

  • How the worker is paid
  • Whether expenses incurred by the worker are reimbursed
  • The extent to which a worker can realize a profit or loss
  • The workers ability to offer his/her services to others companies

Relationship Between the Parties

This test examines the facts that show what type of working relationship exists.

  • Is there a written contract describing the relationship and expectations?
  • Does the worker receive any benefits (i.e. – pension plan, insurance, vacation pay, etc.)?
  • Is there a time frame to the relationship?
  • What role does the worker fill in the company’s principal business?

These are just a few of the factors that need to be considered in each category. If after reviewing the facts and circumstances the determination still can’t be made, a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Tax and Income Tax Withholding, can be filed with the IRS to have them review the facts and give you a determination of status.

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Certain factors will define a workers status in every case, but every case is unique and the individual facts and circumstances will dictate the classification of the worker.