IRS Worker Classification

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Are you classifying your workers correctly? There are times when you must pay someone as an Employee, and times when you can pay them as an Independent Contractor. Learn the differences so you don't run afoul of IRS rules!

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IRS Worker Classification

  1. 1. Page 1 of 6Courtesy of the WunderLand GroupWhen Can You Pay a Worker as anIndependent Contractor and WhenDo You Have to Pay Them as aTemporary Employee?A WORKSHEET FOR EMPLOYERS TO DETERMINE IRS EMPLOYMENT STATUSQuestions 1 – 3 are significant questions. If the answer to any of them is "Yes," it is a strongindication that the worker is an employee, and you have a high probability of risk if you classifyand pay the worker as an independent contractor.1. Do you supervise or instruct the person while he or sheis working?Yes NoIndependent contractors are free to do jobs in their own way,using any method they choose. A person or firm engages anindependent contractor for the jobs end result. When a worker isrequired to follow company procedure manuals and/or is givenspecific instructions on how to perform the work, or is told whatcomputer software to use, or must follow company brandingguidelines, the worker is an employee.2. Can the worker quit or be discharged (fired) at any time?If you have the right to fire the worker without notice, itindicates that you have the right to control the worker.Independent contractors are engaged to do specific jobs andcannot be fired before the job is complete unless they violate theterms of the contract. They are not free to quit and walk awayuntil the job is complete. For example, if a shoe store ownerhires an attorney to review his or her lease, the attorney wouldget paid only after satisfactory completion of the job.Yes No3. Is the work being performed part of your regularbusiness?Work which is a necessary part of the regular trade or business isnormally done by employees. For example, a sales clerk isselling shoes in a shoe store. A shoe store owner could notoperate without sales clerks to sell shoes. On the other hand, aplumber engaged to fix the pipes in the bathroom of the store isperforming a service on a one- time or occasional basis that is notan essential part of the purpose of the business enterprise. Adesigner in a design firm engaged to create materials for thefirms clients would also be an example of someone who shouldbe classified as an employee.Yes No
  2. 2. Page 2 of 6Courtesy of the WunderLand GroupA "No" answer to questions 4 – 6 indicates that the individual is not in a business for himself orherself and would therefore normally be an employee.4. Does the worker have a separately establishedbusiness?When individuals hold themselves out to the general public asavailable to perform services similar to those performed for you,it is evidence that the individuals are operating separatelyestablished businesses and would normally be independentcontractors. Independent contractors are free to hire employeesand assign them to do your work if they choose. Independentcontractors have the authority to fire their employees withoutyour knowledge or consent. Independent contractors cannormally advertise their services online, in publications or yellowpage listings, and/or seek new customers through the use of websites or business cards.Yes No5. Is the worker free to make business decisions whichaffect his or her ability to profit from the work?An individual is normally an independent contractor when he orshe is free to make business decisions which impact his or herability to profit or suffer a loss. This involves real economic risk,not just the risk of not getting paid. These decisions wouldnormally involve the acquisition, use, and/or disposition ofequipment, facilities, and stock in trade which are under his or hercontrol. Further examples of the ability to make economicbusiness decisions include the amount and type of advertising forthe business, the priority in which assignments are worked, andselection of the types and amounts of insurance coverage for thebusiness.Yes No6. Does the individual have a substantial investment whichwould subject him or her to a financial risk of loss?Independent contractors furnish their own tools, equipment, andsupplies needed to perform the work. Independent contractorsnormally have an investment in the items needed to completetheir tasks. To the extent necessary for the specific type ofbusiness, independent contractors provide their own businessfacility, and their own equipment including computers andsoftware.Yes No
  3. 3. Page 3 of 6Courtesy of the WunderLand GroupQuestions 7 – 13 are additional factors that should be considered. A "Yes" answer to any ofthe questions is an indication the worker may be an employee, but no one factor by itself isdeciding. All factors must be considered and weighed together to determine which type ofrelationship exists. However, the greater the number of "Yes" answers to questions 7 – 13 thegreater the likelihood the worker is performing services as an employee.7. Do you have employees who do the same type of work? Yes NoIf the work being done by the contractor is basically the sameas work that is as work that is normally done by your employees, itindicates that the worker is an employee. This applies evenif the work is being done on a one-time basis. For instance, tohandle an extra workload or replace an employee who is onvacation, a worker is hired to fill in on a temporary basis.This worker is a temporary employee, not an independent contractor.8. Do you furnish the tools, equipment, or supplies used toperform the work?Independent business people have their own tools, equipment, andsupplies needed to perform the work. Independent contractorsnormally have an investment in the itemsneeded to complete their tasks.Yes No9. Is the work considered unskilled or semi-skilled labor? Yes NoThe courts have held that workers who are considered unskilledor semi-skilled are the type of workers the law is meant toprotect and are generally employees.10. Do you provide training for the worker?In skilled or semi-skilled work, independent contractors usually donot need training. If training is required to do the task, it is anindication that the worker is an employee.Yes No11. Is the worker paid a fixed salary, an hourly wage, or Yesbased on a piece rate basis?NoIndependent contractors agree to do a job and bill for theservice performed. Payments to independent contractors forlabor or services are made upon the completion of the project orcompletion of the performance of specific portions of theproject.12. Did the worker previously perform the same or similar Yesservices for you as an employee?If the worker previously performed the same or similar servicesfor you as an employee, it is an indication that the individual isstill an employee.No
  4. 4. Page 4 of 6Courtesy of the WunderLand Group13. Does the worker believe that he or she is an employee?Although belief of the parties is not controlling, intent of theparties is a factor to consider when making an employment orindependent contractor determination. When both the workerand principal believe the worker is an independent contractor, anargument exists to support an independent contractor relationshipbetween the parties.Yes No
  5. 5. Page 5 of 6Courtesy of the WunderLand GroupInterpretations of AnswersDepending on the services being performed and the type of occupation, this questionnairemay produce a variety of results. There may be some factors which lean toward employmentand some which lean toward independence. The answers to questions 1 – 6 provide astrong indication of the presence or absence of direction and control. The answers toquestions 7 – 13 when joined with other evidence may carry greater weight when indicatingthe presence or absence of direction and control.1. If all of the answers to questions 1 – 3 are "No" and all of the answers to questions 4 – 6are "Yes," there is an indication of independence. When this is the case, there are likelyto be a number of "No" answers to questions 7 – 13 which add to the support of thedetermination.2. If all of the answers to questions 1 – 3 are "Yes" and all of the answers to questions 4 – 6are "No," it is very strong indication that the worker in question is an employee. Whenthis is the case, there are likely to be a number of "Yes" answers to questions 7 – 13which add to the support of the determination.3. If the answer to question 1 or 2 is "Yes" or the answer to any one of questions 4 – 6 is"No," there is a likelihood of employment. At the very least, this pattern of answersmakes the determination more difficult since the responses to questions 7 – 13 willprobably be mixed.4. If the answer to question 3 is "Yes" and the answer to question 4 is "No," there is alikelihood of employment. Given this pattern of answers, it is probable that the answers toquestions 5 and 6 will also be "No." When this happens you may also see more "Yes"answers to the last group of questions (7 – 13). This scenario would support anemployment determination.These four scenarios illustrate only a few combinations of answers that could result from theuse of this Employment Determination Guide, depending on the working relationship aprincipal may have with a worker and the type of occupation. The more the pattern ofanswers vary from the above four situations, the more difficult it is to interpret them. Insituations 1 and 2, there is a greater chance that the interpretation will be accurate, and theypresent the least risk to the business owner of misclassifying the worker.For more information, visit http://www.irs.gov/businesses/small/article/0,,id99921,00.html
  6. 6. Page 6 of 6SOME EXAMPLES OF INDEPENDENT CONTRACTORSAND COMMON LAW EMPLOYEESIndependent ContractorsAn attorney or accountant who has his orher own office, advertises in the yellowpages of the phone book under "Attorneys"or "Accountants," bills clients by the hour, isengaged by the job or paid an annualretainer, and can hire a substitute to do thework is an example of an independentcontractor.EmployeesAn attorney or accountant who is employedby a firm to handle their legal affairs orfinancial records, works in an office at thefirms place of business, attends meetingsas needed, and the firm bills the clients andpays the attorney or accountant on aregular basis is an example of anemployee.An auto mechanic who has a station An auto mechanic working in someoneslicense, a resale license, buys the parts shop who is paid a percentage of the worknecessary for the repairs, sets his or her billed to the customer, where the owner ofown prices, collects from the customer, the shop sets the prices, hours, and dayssets his or her own hours and days of the shop is open, schedules the work, andwork, and owns or rents the shop from a collects from the customers is an examplethird party is an example of an of an employee.independent contractor.Graphic designers who rent their ownoffice or work from a home office, whowork for multiple clients, who performthe work on their own computer with thesoftware of their choice, and who settheir own work hours while completingyour project by an agreed-upon date,are examples of independent contractors.Designers who work in a companys office,who work on the companys computer andwith their software, who work set hours thatthe company dictates, who are paid by thehour, whose work is directed and issupervised by the company, and who can befired or let go for any reason, are examplesof employees.A repair person who owns or rents a shop,advertises the services to the public,furnishes all of the tools, equipment, andsupplies necessary to make repairs, setsA repair person working in a shop wherethe owner sets the prices, the hoursand days the shop is open, and therepair person is paid a percentage of thethe price for services, and collects from the work done, is an example of an employee.customers is an example of an independentcontractor.

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