Worker classification is always important to the IRS. But now the DOL is turning up the heat by joining with the IRS to tackle misclassification, prompted by ongoing complaints from workers. The overriding issue is that the employer can’t just decide that a person will be an independent contractor, the economic reality of control vs. independence is the deciding factor. Below are the defining characteristics of each:
- Work is not an integral part of the employer’s business.
- Worker directs scheduling of time.
- Worker invests in equipment or marketing to perform work for more than one company.
- Worker isn’t economically dependent on the employer; he or she is conducting his or her own business.
- Nature of the worker’s task is essential to the business.
- Business aspects of the worker’s job are controlled by the payer. (Factors include scheduling, how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Company directs how the worker performs his or her job.
- Permanence or indefinite job term due to industry characteristics. For example, work may be seasonal, but if that is a characteristic of the industry, then the work is still considered permanent.
There is no set number of factors that makes the worker an employee or an independent contractor, and no one factor stands alone in making the 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.
If, after reviewing the evidence, it’s still unclear whether a worker is an employee or an independent contractor, a business or worker can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding with the IRS. The IRS will review the facts and circumstances and officially determine the worker’s status.
Be aware that it can take at least six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form SS-8 to be certain.
Salmon Sims Thomas tax advisors are another resource for determining IRS rules regarding employment. Please contact us for additional help.