10-01-2007, 04:16 PM
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Join Date: Jan 2007
Location: New Jersey, USA
Will your employee's status as an outside contractor pass the IRS litmus test?
HOW CAN AN OWNER DETERMINE WHETHER AN EMPLOYEE IS AN OUTSIDE CONTRACTOR? There are major tax advantages available for classifying consultants or employees, as independent contractors. The independent contractor would not be subject to any federal or state employment taxes. For the employers, clearly the advantages are that they too are not required to match the self-employment taxes, not be subjected to workman’s compensation insurance and other obligatory payroll benefits and pension costs. As a result of these advantages, employers have been aggressively classifying employees as outside consultants or contractors, resulting in substantial losses of revenue to both the IRS and various State Tax Agencies from payroll taxes. As a consequence of preventing abusive classifications, the IRS has formally identified a checklist of about 20 questions to determine if a particular worker is to be classified as an independent contractor or an employee. The following represents checklist of 20 questions that would be presented to an owner who is being audited by the IRS to ascertain whether or not an employee deserves an independent contractor classification. The answers provided to each question will determine whether the employee passed the independent classification test. There are no questions that exclusively determine contractor status classification, but, if the employee meets most of the tests, there is a strong possibility of that the employer can designate “Independent Contractor” status an employee.
These are just some of the important factors used by the IRS. Clearly there may be some unusual situations unique to your business that may require further review for which I strongly recommend that you consult a CPA or tax professional.
- Is the worker obligated to comply with instructions about when, where and how the services or work are to be performed? For an independent contractor classification, the company that hires you does not generally give the job instructions.
- Is the worker provided training that would enable him/her to perform a job in a particular method or manner? For an independent contractor classification, there generally is little or no training requirement and is usually not provided by the company.
- Is the worker performing services that would be considered both essential and an integral part of the operations? For an independent contractor classification, generally, the work you are performing is not essential to the company.
- Does the employee personally provide the service? For an independent contractor classification, the worker’s personal services are not required; and that he or she should be free to assign the work to anyone.
- Does the business hire, supervise, or pay assistants to help the worker on the job? For an independent contractor classification, the employer should not control you and hire assistants to assist in completion of the job.
- Is there a continuing relationship between the worker and the person for whom the services are performed? For an independent contractor classification, the worker would not have any continuing relationship with the company.
- Does the Employer establish the work schedule? For an independent contractor classification, the worker would set his or her own work schedule.
- Does the Employer require the worker to devote his/her full time to the one Company that he/she performs services for? For an independent contractor classification the worker is free to pursue other work or engagements.
- Is the work performed at the place of business of the company or at specific places set by the company? For an independent contractor classification, the location of where the services or work is performed is at the discretion of the employer.
- Does the recipient of the services direct the sequence in which the work must be done? For an independent contractor classification, the worker sets his or her own work priorities.
- Does the employer require interim oral or written reports to be submitted by the worker? For an independent contractor classification no interim reports are required of the worker.
- Would the worker be paid on an hourly, weekly, or monthly basis as opposed to being paid on completion of the job? For an independent contractor classification, the timing of payment coincides with completion of job, rather than in regular intervals.
- Does the employer reimburse any business or traveling expenses to the worker? For an independent contractor classification, the worker would not seek any reimbursement for any business related or traveling expenses, and instead would pay for their own business expenses.
- Does the company provide essential resources, tools or materials used by the worker in order for the worker to perform on his job? For an independent contractor classification, the worker would be using his/her own tools and equipment.
- Has the worker failed to invest in equipment or facilities used to provide the services? For an independent contractor classification, the worker would have made a significant capital investment into equipment, tools, resources and facilities.
- Does the arrangement put the person in a position or realizing either a profit or loss on the work? For an independent contractor classification, there is always a possibility of incurring loss, which is entirely would be responsibility of the contractor. The employee designation would mean that there is no possibility of incurring a loss for any work performed.
- Does the worker perform services or work exclusively for only one company rather than working for a number of companies at the same time? For an independent contractor classification, the contractor would not be restricted to perform services exclusively for only one company, he or she would be performing services for more than one company at any moment in time.
- Does the worker in fact make his/her services regularly available to the general public? For an independent contractor classification, the worker would be marketing his or her services to the general public.
- Is the worker subject to dismissal for reasons other than non-performance of the contract specifications? For an independent contractor classification, the right of discharge is limited by contract terms.
- Can the worker be compensated for an incomplete job? For an independent contractor classification, there would be no of payment for incomplete work.
Last edited by TaxGuru : 12-02-2007 at 01:18 PM.