Independent Contractor or Employee?

"U.S. vs. Silk" Holding: Coal loaders were held to be employees because their work was unskilled and vital to the hiring firm's regular business. The workers only provided picks and shovels. This ruling was made even though the unloaders were paid per ton unloaded and some were "floaters" who only worked sporadically.

"H.D. Morgan Signs Inc."

Holding: Sign painter was held to be an employee because he was provided tools, was paid hourly at union rates and performed his work personally. The painter did the same work as employees, kept the same hours and received Christmas bonus. The ruling was made even though painter worked for other firms during slow periods.

Checklist

When the IRS audits a company and spot-checks for fraudulent independent contractors, it relies on these 20 "common law" principles (Source: Revenue Ruling, 87-41).

  • No instructions: Contractors can not be required to follow instructions to accomplish their tasks.

  • No training: Contractors rarely receive training to perform a task.

  • Service can be rendered by others: Contractors can hire others to do the work for them.

  • Own work hours: Contractors set their own work hours.

  • Work not essential to the company

  • Most contractors do not have a day-to-day relationship with their employers.

  • Control of assistants: Contractors can hire, supervise and pay assistants independent of their employers.

  • Time to pursue other work: Contractors should have enough time to pursue other work.

  • Job location: The contractor has control of the sequence of tasks that lead to finishing the job.

  • No progress reports: Contractors are not required to submit interim reports to employer.

  • Paid for the job:Contractors are paid for the job, not for the time spent doing the job.

  • Working for multiple firms: Contractors should have time to do work for more than one employer.

  • Business expenses: In most cases, contractors should pay their own expenses involved in doing a job.

  • Own tools: Contractors usually furnish their own tools.

  • Significant investment: Contractors' investment in their trade must be significant enough to make them independent of employer's facilities.

  • Services available to the public: Contractors are must show they make their services available to other employers.

  • Potential profit or loss: Contractors liable for any expenses and liabilities they may encounter in performing their jobs.

  • Limited right to discharge: Contractors cannot be fired at will so long as they produce a result specified in their contract.

  • No compensation for non-completion: Contractors cannot be paid for partial completion of a job.

Common-law rules:

To help you determine whether an individual is an employee under the common-law rules, the IRS has identified 20 factors that are used as guidelines to determine whether sufficient control is present to establish an employer-employee relationship.

These factors should be considered guidelines. Not every factor is applicable in every situation, and the degree of importance of each factor varies depending on the type of work and individual circumstances. However, all relevant factors are considered in making a determination, and no one factor is decisive.

It does not matter that a written agreement may take a position with regard to any factors or state that certain factors do not apply, if the facts indicate otherwise. If an employer treats employee as an independent contractor and the relief provisions discussed earlier do not apply, the person responsible for the collection and payment of withholding taxes may be held personally liable for an amount equal to the taxes that should have been withheld.

The 20 factors indicating whether an individual is an employee or an independent contractor are:

  1. Instructions. An employee must comply with instructions about when, where, and how to work. Even if no instructions are given, the control factor is present if the employer has the right to control how the work results are achieved.

  2. Training. An employee may be trained to perform services in a particular manner. Independant contractors ordinarily use their own methods and receive no training from the purchasers of their services.

  3. Integration. An employee's services are usually integrated into the business operations because the services are important to the success or continuation of the business. This shows that the employee is subject to direction and control.

  4. Services rendered personally. An employee renders services personally. This shows that the employer is interested in the methods as well as the results.

  5. Hiring assistants. An employee works for an employer who hires, supervises, and pays workers. An independent contractor can hire, sunpervise, and pay assistants under a contract that requires him or her to provide materials and labor and to be responsible only for the result.

  6. Continuing relationship. An employee generally has a continuing relationship with an employer. A continuing relationship may exist even if work is performed at recurring although irregular intervals.

  7. Set hours of work. An employee usually has set hours of work established by an employer. An independent contractor generally can set his or her own work hours.

  8. Full-time required. An employee may be required to work or to be available full-time. This indicates control by the employer. An independent contractor can work when and for whom he or she chooses.

  9. Work done on premises. An employee usually works on the premises of en employer, or works on a route or at a location designated by an employer.

  10. Order or sequence set. An employee may be required to perform services in the order or sequence set by an employer. This shows that the employee is subject to direction and control.

  11. Reports. An employee may be required to submit reports to an employer. This shows that the employer maintains a degree of control.

  12. Payments. An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job or on a straight commission.

  13. Expenses. An employee's business and travel expenses are genrally paid by an employer. This shows that the employee is subject to regulation and control.

  14. Tools and materials. An employee is normally furnished significant tools, materials, and other equipment by an employer.

  15. Investment. An independent contractor has a significant investment in the facilities he or she uses in performing services for someone else.

  16. Profit or Loss. An independent contractor can make a profit or suffer a loss.

  17. Works for more than one person or firm. An independent contractor is generally free to provide his or her services to two or more unrelated persons or firms at the same time.

  18. Offers services to general public. An independent contractor makes his or her services available to the general public.

  19. Right to fire. An employee can be fired by an employer. An independent contractor cannot be fired so long as he or she produces a result that meets the specifications of the contract.

  20. Right to quit. An employee can quit his or her job at any time without incurring liability. An independent contractor usual agrees to complete a specific job and is responsible for its satisfactory completion, or is legally obligated to make good for failure to complete it.

IRS help to make determination. If you are unable to determine from the preceding guidelines whether a worker is your employee, you can file a form SS-8.