Independant Contractor Status

12/19/2012

It appears that more and more business owners are retaining independant contractors as opposed to employees.  On reason is that business owners benefit by avoiding the administrative hassles of employing workers and the out-of pocket costs of payroll taxes and fringe benefits (including health insurance).   

However, if someone is truly an employee, you cannot just call that person an independant contractor and treat that person as an independant contractor for tax and other purposes.

There is a multi-factor test that is typically looked at to determine if a person is an independant contractor or an employee.  The factors which are looked at, in no particular order, are as follows:

  • Few instructions are given to the contractor about how, when, and where the work is done;
  • Little training is provided by the company;
  • The contractor’s services are not integrated with the company’s operations;
  • The contractor hires, supervises, and pays his or her own assistants;
  • The relationship with the company is not continuing or is infrequently recurring;
  • The contractor set his or her working hours;
  • The contractor does not work full-time for the company;
  • The contractor does not work at the company’s location;
  • The contractor sets the steps in which the work will be done;
  • The contractor is not required to submit written or oral reports;
  • The contractor is paid by the job rather than by the week or month;
  • The contractor is not reimbursed for business or traveling expenses;
  • The contractor provides his or her own equipment and supplies;
  • The contractor invests in the facilities used for doing the work;
  • The contractor can realize a profit or suffer a loss as a result of providing the services;
  • The contractor works for many different companies at the same time;
  • The contractor’s services are available to the general public on a regular basis;
  • The contractor cannot be fired as long as he or she produces the requested work;
  • The contractor cannot terminate the relationship with the company until the work is complete;
  • The contractor and the business have a written agreement setting forth the status as an independant contranctor relationship.

No one factor is controlling.  It is a weighing and balancing approach to determine a person's status as either an employeee or indepnedent contractor.

The application of these factors can be illustrated by a recent case where  the IRS reclassified masons as employees and charged the construction company over half a million dollars in back taxes.  Although the workers provided their own tools and were free to seek employment as masonry workers with other businesses, the business always delivered instructions to the workers prior to commencement of the project and many workers worked exclusively for the construction company. Also the workers worked a required eight-hour day; they could be fired at will.  They received weekly cash payments based on their productivity.    


There are three important steps business owners should follow that can help in the classification of a person as an independant contractor.  These steps are:   
  • First, define the relationship in a written business document.  
  • Second, structure the work relationship in such a way, using the 20 factors as a guide, that it is an independent contractor relationship.  
  • Third, comply with the IRS’s reporting requirements, primarily the issuance of Form 1099s for the independent contractors.