Employees Vs. Independent Contractors
Profit Ability Article Highlight

Almost every business owner running a growing company is swamped with a to-do list a mile long. It is just part of the game. There may be so many things to worry about that an independent contractor's (IC) work status is not a priority. As a business grows, an oft-used method of acquiring help is to hire part- or full-time workers as ICs. This can be a good way to obtain help without the obligation of a long-term employment contract. Also, classifying a worker as an IC allows the employer to avoid various costs and paperwork requirements that come along with having employees. However, for many companies, the use of ICs actually represents a huge potential tax liability if the workers fail to pass IRS "employee vs. IC" tests.

Some companies, after using ICs on a long-term basis, are reviewed by the IRS and found to have been in violation of "employee vs. IC" rules. Those companies end up having to make up a myriad of back taxes and penalties. These "employee vs. IC" tests look how your ICs actually perform their work, as well as how they are trained and compensated. The tests, will help you determine whether that IC you are using should really be classified as an employee. Every company using ICs should review each worker's situation to ensure they would actually qualify as ICs in the eyes of the IRS. To assist you to this end, we have compiled two lists of characteristics the IRS considers when classifying a worker as an employee or as an IC.

Take a few minutes to review these lists with respect to each of your ICs to determine if you are treating them in accordance to IRS rules. We must note that these lists are by no means comprehensive. However, they will serve as a good start. If you have further questions on this issue, contact our offices.

ICs are not controlled by the companies that hire them. The hiring company's control is limited to accepting or rejecting the final results an IC achieves. Our friends at the IRS are more likely to classify a worker as an independent contractor if he or she:

• Can earn a profit or take a loss from the activity
• Invests/furnishes own equipment, tools and materials needed to do the job
• Has has other clients or customers
• Performs work at a location of his own choosing
• Pays own business & traveling expenses
• Hires and pays assistants
• Sets his or her own working hours
• Also offers services to the general public
• Makes an investment in his or her own facilities and uses them to perform services

In contrast, under the IRS test, workers are employees if the people/companies they work for have the right to direct and control the way they work -- including the details of when, where and how they do their jobs. This is a good rule of thumb. The IRS is more likely to classify a worker as an employee who:

• Can be fired at any time by the hiring company
• Is paid by the hour
• Receives instructions from the hiring company
• Receives training from the hiring company
• Works full time for the hiring company
• Receives employee benefits
• Has right to quit without incurring liability
• Provides services that are an integral part of
  the hiring company's day-to-day operations