Updated: Sep 20, 2018
It is essential for small businesses to understand the importance of classifying a worker as an employee or an independent contractor. For federal employment tax purposes, a business must examine the relationship between it and the worker. The IRS Small Business and Self-Employed Tax Center offers numerous excellent resources if you wish to learn more.
Although definitions for each employment type are not set in stone, there are several questions you may ask yourself when determining an individual's employment status:
Does the company direct when, where, and how work is done?
Is the business asking the individual to undergo company-provided training? If so, then the company is directing an individual how the work must be accomplished.
Are the individual's services integrated into the company's business operations or do the services significantly affect business success?
Does the company insist that a particular person perform the work?
Does the worker retain control over hiring, supervising, and paying helpers?
Is there a continuous relationship between a company and a worker?
Are the hours or days of work dictated by the company?
Is the individual working full or part-time?
Is the employer requiring the individual to work on company premises?
Does the company require work to be performed in a specific order or sequence?
Is an individual obligated to regularly provide written or oral reports on the status of a project?
Does the company insist on hourly, weekly, or monthly pay schedules? Or, is payment conditioned on commission or project completion?
Is the company paying business or travel expenses?
Does the individual who performs most of their work her own or company-provided equipment, tools, and materials?
Does the individual provide his own work facilities?
Does the worker receive predetermined earnings? Does he have little chance to realize significant profit or loss through their work generally?
Does the worker simultaneously provide services for several unrelated companies?
Does a worker regularly make her services available to the general public?
Does a company have a unilateral right to discharge a worker or does it depend on contractual terms?
Does the worker have the ability to terminate their work for a company without liability?
Because these questions are sometimes still insufficient to determine employment status, the IRS also uses the "economic reality test." This test focuses heavily on the degree of control the company has over the worker.
The complexity of this issue exists because there is no single factor or law that determines a worker's status. That said, a company faces stiff financial penalties for misclassification of workers, including fines, interest and penalties. If the misclassification is found to be willful, the IRS can assess harsher penalties.
To learn more about good legal employment practices, call us today at (575) 425-1787 to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit.