A hot topic with the IRS right now is classifying workers between employees and independent contractors. There can be both positive and negative results on how a worker is classified, both for the company/employer and the worker. The IRS considers three factors when determining whether a worker is an employee or an independent contractor. Behavioral control
This characteristic deals with how the company/employer behaves towards the worker and the work they are performing. If the employer/company has the right to direct or control how the worker does the work, then they are most likely an employee. The business does not actually have to direct or control the way the work is done, as long as they still have the right. Also, if the company/employer requires the worker to attend any kind of training, this suggests that the worker is an employee. If the business does not have the right to direct how the work is done, but merely suggests timing and deadlines, then the worker is most likely an independent contractor.
Financial control
This characteristic deals with how the company/employer directs or controls the financial and business aspects of the work. If the worker has a significant investment in their work, has unreimbursed expenses related to the work, or has the opportunity to realize a profit or loss on the work, then they are most likely an independent contractor. Employees typically do not incur expenses that are not reimbursed by their employer, including significant investments such as vehicles or computers. Employees also do not realize a profit or loss from performing their work since they are paid their same hourly/salary rate.
Relationship of the parties
This characteristic deals with the relationship the parties have and includes written contracts, benefits, the term of the relationship, and whether the services provided are a key part of the company’s/employer’s business. If the worker is provided any kind of benefit by the company/employer, such as health insurance or participation in a retirement plan, they are most likely an employee. If the services provided by the worker are at the core of the business’ operations, then they are most likely an employee.
The terms of the worker’s relationship can be easily defined in a written contract, which will also serve as evidence if the worker’s status is called into question. The worker and employer/company can use the contract to pass or fail all of the tests listed above in order to classify the worker as expected. A word of caution – if the signed contract says one thing but the actual work performed is different, the classification of the employee or independent contractor can be reversed based on what actually occurred.
In closing, with the IRS calling into question employment status more often, both employers and employees are encouraged to revisit their staffing arrangements and verify that workers are properly classified based on the characteristics above.