With the IRS beginning a nationwide crackdown on employers that try to dodge, now’s the time to make sure your workers are properly classified.
Starting in February, IRS auditors began poring over the records of thousands of employers to root out organizations that try to cheat the system by calling workers contractors when they’re actually employees. (See “IRS to audit 6,000 firms to test employment tax compliance.”)
Make sure you’re on the right side of the tax code by answering these eight questions about the people who work for you.
Note: Determining a worker’s status hinges on one key point: degree of control. The more control you exert over the person’s schedule and duties, the more likely he or she will be deemed an employee—not an independent contractor.
1. Are instructions given and taken? Employees are typically subject to the business’s instructions about when, where and how to work; an independent contractor is not.
2. What training do you provide? Employees may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.
3. Can the worker incur a loss? Contractors can make a profit or suffer a loss. Employees can only make money as a result of their work, not lose it.
4. Is the worker available for other jobs? Evidence that someone is a contractor includes online or Yellow Pages ads and proof of working for more than one firm.
5. How do you pay the worker? Employees are generally paid by the hour, week or month. Independent contractors are generally paid a flat fee or by the job.
6. Do you provide benefits? Perks such as insurance, pension plans, paid vacation and sick days are typically not granted to independent contractors.
7. How essential is the worker? If the worker provides services that are a key aspect of the business, it’s more likely this person would be an employee.
8. What’s the long-term plan? If you hire a worker with the expectation that the relationship will continue indefinitely—rather than a specific project or period—this is generally considered evidence that the intent was to create an employer-employee relationship.
Final note: Employers must weigh all these factors. As the IRS says, “There is no set number of factors that ‘makes’ the worker an employee or an independent contractor. … The key is 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.”
- How to Fire an Employee the Legal Way: 6 Termination Guidelines
- Small Business Tax Deduction Strategies
- Offering new employee higher pay than incumbent of opposite sex? Document why
- TAX TRAVELS OF THE ANCIENT MARINER
- Lessons from the Tax Court: Old age is no excuse
- Real-world cost of health insurance: $270 per month