Who Qualifies as
an Independent Contractor?
One
of the most prevalent approaches used to categorize a worker as
either an employee or independent contractor is
the analysis created by the IRS.
The key issue is how much control the employer has over
the worker and the way in which the worker performs his or her
job. The IRS considers the following:
What instructions
the employer gives the worker about when, where, and how to
work. The more specific the instructions and the more
control exercised, the more likely the worker will be considered
an employee.
What training the
employer gives the worker. Independent contractors
generally do not receive training from an employer.
The extent to
which the worker has business expenses that are not reimbursed.
Independent contractors are more likely to have unreimbursed
expenses.
The extent of the
worker's investment in the worker's own business.
Independent contractors typically invest their own money in
equipment or facilities.
The extent to
which the worker makes services available to others.
Independent contractors are more likely to make their services
available to others.
How the business
pays the worker. An employee is generally paid by the
hour, week, or month. An independent contractor is usually paid
by the job.
The extent to
which the worker can make a profit or incur a loss. An
independent contractor can make a profit or loss, but an
employee does not.
Whether there are
written contracts describing the relationship the parties
intended to create. Independent contractors generally
sign written contracts stating that they are independent
contractors and setting forth the terms of their employment.
Whether the
business provides the worker with employee-type benefits, such
as insurance, a pension plan, vacation pay, or sick pay.
Independent contractors generally do not get benefits.
The terms of the
working relationship. An employee generally is employed
at will (meaning the relationship can be terminated by either
party at any time). An independent contractor is usually hired
for a set period of time.
Whether the
worker's services are a key aspect of the company's regular
business. If the services are necessary for regular
business activity, it is more likely that the employer has the
right to direct and control the worker's activities. The more
control an employer exerts over a worker, the more likely it is
that the worker will be considered an employee.
What Can You Do?
There are
ways to reduce the risk of an investigation or challenge by a
state or federal authority. At a minimum, you should:
Familiarize
yourself with the rules. Ignorance of the rules is not
a legitimate defense. Knowledge of the rules will allow you to
structure and manage your relationships with your workers
carefully to minimize risk.
Document
relationships with your workers and vendors. Although
it won't always save you, it helps to have a written contract
stating the terms of employment.
If
this is a recurring or significant issue for your business,
consult with a qualified attorney.
Notice:
The foregoing information is provided for informational purposes
only and is not meant to constitute legal advice; your specific
legal issue may vary from the one described in this article and
you should seek the advice of a qualified lawyer regarding your
own situation.
The views of our authors don' t necessarily
reflect the views and policies of this company or its
advertisers.
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