Employers often struggle with the issue of whether to treat a worker as an “employee” or an “independent contractor.” This classification is an important determination from a tax perspective because it, among other things, dictates who (the employing company or the worker) is responsible for tax withholdings, particular types of insurance, and other similar issues.
When making the determination as to whether a particular worker is an employee or an independent contractor, there are many factors to take into consideration. Not one factor is determinative regarding the classification of a worker, but some factors do weigh more heavily than others. The three categories of factors that the IRS considers when making this determination are behavioral, financial, and type of relationships.
Behavioral. The behavioral category includes factors relating to the right to direct and/or control how the contracted work is done. This category includes the following factors to be considered:
- Types of Instruction Given—How much control does the company retain over the work?
- Degree of Instruction—How detailed are the employer’s instructions?
- Evaluation Systems—Is the worker being evaluated on details or results?
- Training—Is formal training required?
Financial. The financial category includes factors relating to the right to control the economic aspect of the work. This category includes the following factors to be considered:
- Significant Investment—Is the worker making a significant investment in the equipment used?
- Unreimbursed Expenses—Does the worker have ongoing costs that accrue regardless of whether the work is performed?
- Opportunity for Profit or Loss—Does the worker have an opportunity to incur loss
- Services Available to the Market—Can the worker seek out other business opportunities?
- Method of Payment—Is the worker paid a regular wage or flat fee?
Type of Relationship. The type of relationship category includes factors relating to how the worker and business perceive their relationship to each other. This category includes the following factors to be considered:
- Written Contracts—How does the employment contract fit in with these factors?
- Employee Benefits—Does the worker receive benefits, including but not limited to insurance, pension plans, paid vacation, sick days, and disability insurance?
- Permanency of Relationship—Will the employment relationship continue indefinitely?
- Services Provided as Key Activity of the Business—Is the service key to the business?
Again, none of these factors are alone determinative. Instead, the circumstances must be examined in light of these various factors. Based on the totality of this analysis, one can give a good faith determination for whether an individual should be classified as an independent contractor or an employee.
Once you have had an opportunity to consider these classification factors as they relate to your current contracts and the current procedures and needs of your company, please contact Titus Brueckner & Levine PLC at 480-483-9600, or contact Kurt M. Brueckner directly at kbrueckner@tbl-law.com.