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Robert J. Weil
Law Office of Robert J. Weil, PLLC
4031 University Drive, Suite 100
Fairfax, Virginia 22030
(703) 934 2036 ...
IS YOUR CONSULTANT AN INDEPENDENT CONTRACTOR OR EMPLOYEE?
The issue of independent contractor vs. employee status is comin...
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6. Continuing relationship: A continuing relationship between the worker and the person or
persons for whom the services...
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15. Significant investment: If the worker invests in facilities that are used by the worker in the
performance of his or...
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private letter ruling or technical advice memorandum issued to the taxpayer; or a long-standing
recognized practice of a...
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Independent contractor or employee article for website

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Independent contractor or employee article for website

  1. 1. Robert J. Weil Law Office of Robert J. Weil, PLLC 4031 University Drive, Suite 100 Fairfax, Virginia 22030 (703) 934 2036 O (703) 277 7730 F (703) 399 5671 C bob@rweillaw.com www.rweillaw.com Is Your Consultant An Independent Contractor or Employee?
  2. 2. IS YOUR CONSULTANT AN INDEPENDENT CONTRACTOR OR EMPLOYEE? The issue of independent contractor vs. employee status is coming up more frequently as organizations out-source work previously performed in-house by staff. The following is simply an overview of the issues which need to be considered when entering into any agreement for the services of an independent contractor or consultant. Under the Internal Revenue Code, payments made to an individual who is an independent contractor are not subject to withholding. In general, an individual who is subject to the control and direction of another only as to the result of his work, and not as to the means, is an independent contractor. The key element is the level of the employer's control over the worker. These control factors include behavioral control, financial control and the relationship of the parties. The following factors have been developed by the IRS for use in ascertaining whether a worker is an employee or an independent contractor. The thrust of these twenty factors is to determine whether sufficient control is present to establish an employer-employee relationship. The degree of importance of each factor varies depending upon the factual context in which the services are performed. However, the critical element remains the level of control exercised by the employer. 1. Instructions: A worker who is expected to comply with other persons' instructions and demands about when, where and how he or she is to work is ordinarily an employee. The control factor is present where the person for whom the work is being performed has the right to require compliance with his or her instructions. 2. Training: Training a worker by requiring an experienced employee to work with or train the worker in question indicates that the persons for whom the services are performed want those services performed in a particular manner or method. 3. Integration: The more the worker's services are integrated into the business operations of the employer, the greater the likelihood of a showing that the worker is subject to the employer's direction and control. 4. Services rendered personally: If the services must be rendered personally, presumably the person or persons for whom the services are being performed are interested in the methods used to accomplish the work as well as in the results. 5. Hiring, supervising, and paying assistants: If the person or persons for whom the services are performed hire, supervise or pay assistants to the worker, this generally shows control over the worker on the job. However, if the worker is free to hire, supervise and pay his or her assistants under a contract in which the worker agrees to provide materials and labor, and under which the worker is responsible only for the attainment of a result, this tends to indicate independent contractor status.
  3. 3. 3 6. Continuing relationship: A continuing relationship between the worker and the person or persons for whom the services are performed indicates that an employer-employee relationship exists. A continuing relationship may be found to exist where work is performed at frequently recurring though irregular intervals. 7. Set hours of work: The establishment of set hours of work by the person or persons for whom the services are performed is a factor indicating control. 8. Full time required: If the worker is required to devote substantially all of his or her time to the business of the person or persons for whom the services are being performed, this indicates a level of control over the amount of time the worker spends working and impliedly restricts the worker from doing other gainful work. An independent contractor, on the other hand, is free to work when and for whom he or she chooses. 9. Doing work on employer premises: If the work is performed on the premises of the employer, that factor suggests control over the worker, especially if the work could be performed elsewhere. Work done off premises, such as at the office or home of the worker, indicates some level of freedom from control. 10. Order or sequence set: If a worker must perform services in the order or sequence established by the employer, this indicates that the worker is not free to follow his or her own pattern of work but must follow the established patterns and procedures of the person or persons for whom the work is being performed. 11. Oral or written reports: A requirement that the worker submit regular or written reports to the employer indicates a certain level of employer control. 12. Payment by hour, week, or month: Payment in any of these fashions is felt by the IRS to generally point to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on a straight commission generally indicates the worker is an independent contractor. 13. Payment of business and/or travel expenses: If the person or persons for whom the services are being performed ordinarily pays the worker's business and/or travel expenses, the worker is ordinarily considered an employee. 14. Furnishing of tools and materials: The fact that the person or persons for whom the services are being performed furnishes sufficient tools, materials, and other equipment tends to show the existence of an employer-employee relationship.
  4. 4. 4 15. Significant investment: If the worker invests in facilities that are used by the worker in the performance of his or her services, and are not typically maintained by employees (separate office space), such investment tends to indicate that the worker is an independent contractor. Special scrutiny may be given to certain types of facilities, such as home offices. 16. Realization of profit or loss: A worker who can realize profit or suffer a loss as a result of his or her services is generally an independent contractor, but the worker who cannot is an employee. For example, if the worker is subject to a real risk of economic loss due to significant investment or a bona fide liability for expenses, such as salary payments to unrelated employees, that factor indicates that the worker is an independent contractor. 17. Working for more than one firm at a time: If a worker performs more than minimal services for a multiple of unrelated persons or firms at the same time, that factor generally indicates that the worker is an independent contractor. 18. Making service available to the public: The fact that a worker makes his or her services available to the general public on a regular and consistent basis is indicative of an independent contractor relationship. 19. Right to discharge: The right to discharge a worker is a factor indicating that the worker is an employee. An employer exercises control through the threat of dismissal, which causes the worker to adhere to the employer's instructions. An independent contractor, on the other hand, cannot be fired so long as he or she produces a result that meets the contract requirements. 20. Right to terminate: If the worker has the right to end his or her relationship with the person for whom the services are being performed at any time he or she wishes without incurring liability, that factor indicates an employer-employee relationship. In those cases where the IRS determines that a business has misclassified a worker as an independent contractor, the IRS examiner must determine whether the business is entitled to relief from retroactive and prospective liability form employment taxes under Section 530 of the Revenue Act of 1978. To qualify for relief, the business must meet three (3) requirements: 1. Reporting consistency: All Federal tax returns, including information returns, to be filed by the taxpayer with respect to the individual for the period in question, must have been filed by the business on a basis consistent with the business' treatment of the individual as not being an employee. 2. Substantive consistency: The business must have consistently treated similarly situated workers as independent contractors. 3. The business must have had some reasonable basis for not treating the workeras an employee: This may consist of reasonable reliance on: judicial precedent, a published ruling, a
  5. 5. 5 private letter ruling or technical advice memorandum issued to the taxpayer; or a long-standing recognized practice of a significant element of the industry. Any other reasonable basis will also suffice. Remember, the key element to assessing any such relationship is the level of control exercised by the employer or principal over the worker. The more control by the employer/principal and less discretion exercised by the worker, the more likely you’ll be looking at an employer/employee relationship and not the independent contractor or consultant role that was intended. If you have any questions, please contact Robert J. Weil, Esq. at (703) 399 5671 or you can e-mail me at bob@rweillaw.com Law Office of Robert J. Weil, PLLC 4031 University Drive, Suite 100 Fairfax, Virginia 22030 (703) 934 2036 Office (703) 277 7730 Fax (703) 399 5671 Cell bob@rweillaw.com www.rweillaw.com

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