Author: Fred Daus

Last time we went over some of the tax differences between employees and independent contractors and why it's important to choose carefully. Today I want to discuss the method used to classify a worker as either an employee or independent contractor in an attempt to help clarify a somewhat murky area.
Employee or Contractor?
Many companies are surprised to learn there are no straight-forward rules in determining worker classification. There is no simple checklist (or magic 8-ball) available that can give a company the correct answer. Instead, worker classification is determined using common-law rules and relevant facts on an individual basis.
Here is an IRS excerpt discussing the general rules and how to apply them:
In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
Common Law Rules
Facts that provide evidence of the degree of control and independence fall into three categories:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker's job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
So the overall theme of the IRS comon law rules refer to the amount of control of activities the business utilizes. If there is an overall high level of control the company exercises over that person's activities for the company then the worker is probably an employee, however, there are some neutral (not relevant) facts in making this determination. For example, a worker that works from home can be a neutral fact since employees (depending on the job) are also able to work from home.
Applying the common-law rules to a specific worker classification question can be tricky and you still may not be able to make a determination on classification after going through this process. If that's the case, you can ask the IRS to make the determination by filing Form SS-8.
Fred Daus is the Chief Executive Officer and founder of Fredrick James Accounting, Tax & Consulting. He is a member of National Society of Accountants and the National Society of Tax Professionals and has been helping clients save money since 2001. Fredrick James is an innovative, full service accounting firm in Clearwater, Florida. Visit our website www.FredrickJames.com or call 727-230-0716 for more information