What is all the fuss about?
For the longest time, the issue of whether or not someone is an employee or [independent] contractor has been a murky subject. Because there are grey areas in what defines an employee and a contractor, it is no wonder many business owners are confused! Unfortunately, this confusion can lead to costly legal consequences and so it is important that business owners understand the rules and apply the rules correctly to those they hire.
Legal disclaimer: If there is any uncertainty at all you should consult with a trusted business advisor.
If you wrongly classify a person as a contractor when they should in fact be an employee, you may be on the hook for the employee’s payroll taxes and any penalties and interest! Ouch!
How do you determine a worker’s status?
The IRS specifically looks at the amount of control and independence a person has in their position to determine their employee or contractor status. There are three common law categories that help to define the degree of control and independence the person has: behavioral, financial and relationship type. Generally, the less control and independence a person has, the more likely they are an employee. Alternatively, the more control and independence, the more likely they are a contractor.
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?
Using these areas as a guide, the business should weigh all factors to make a determination. During this process, it is likely that the person may be an employee according to some factors and a contractor for others. This is why it is important to look at the entire relationship , not just one or two key items to make the determination. Also, be sure to properly document each factor used in the determination. Keep all this information with the person’s file so that if the IRS investigates, you have everything you need handy to provide to them.
Some key examples:
If a worker provides their own tools that are required for the job, they may be a contractor.
If a worker sets their own hours and, they may be a contractor.
If a worker is hired for a specific period of time (I.e. not permanent), they may be a contractor.
If a worker determines where they work (which may or may not be at the business), they may be a contractor.
What if you need additional help?
If you go through this exercise and are still unsure, you may ask the IRS to review for you. After their review (which can take up to 6 months), the IRS will send their official determination. To have the IRS review, you should fill out Form SS-8. Fill out the form completely and accurately.
Send the completed and signed Form SS-8 to:
Internal Revenue Service
Form SS-8 Determinations
P.O. Box 630
Holtsville, NY 11742-0630
If you still need help or are struggling with the IRS:
You can get additional help using the Taxpayer Advocate Service (TAS). TAS can offer you free help with IRS problems . TAS can help if you can’t resolve your problems with the IRS. If you qualify for help, you will be assigned to one advocate to work until you get resolution. TAS is an independent organization within the IRS. TAS a dvocates know how to work with the IRS. Services are free and tailored to meet your needs and they have offices in every state.