For a long time, there has been discussion and debate about whether an individual should be considered an employee or an independent contractor. The Internal Revenue Service and Department of Labor have a history of auditing this particular area as it has a distinction regarding payroll taxes, social security, worker’s compensation, etc. For this article, we will look at the first point of how to determine if an individual is an employee or an independent contractor through the degree of control and independence.
Evidence of the degree of control and independence fall into three categories:
- Behavioral – Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial – Are the business aspects of the worker’s job controlled by the payer (including but not limited to: how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)?
- Type of Relationship – Are there written contracts or employee benefits (e.g., retirement benefits, medical benefits, vacation pay, etc.)? Will the relationship continue for a specific period of time? Is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
A helpful tool to keep on file to assist in determining whether an individual is an employee or independent contractor is the IRS 20-Factor test. You can find it here: (Independent Contractors IRS 20-Factor Test https://www.regent.edu/admin/busoff/pdf/20-questions1099test.pdf)
In summary, the keys to determine whether an individual is an employee or independent contractor are to look at the entire relationship and consider the extent the company has the right to direct and control the worker. When a conclusion is reached, document each of the factors used in making the determination.
For questions and additional information, please contact Scott Hersee, Small Business Supervising Senior at Tronconi Segarra & Associates. He can be reached at 716 .633.1373 or shersee@tsacpa.com.
