How do you know if you've hired an independent contractor or an employee? The IRS has a nifty list of factors to help you figure it out.
It's important to properly classify your workers as "employees" or "contractors" not only for tax purposes, but also because it dictates the type of relationship you have with your workers, Forbes reminds us.
But simply calling someone an "independent contractor" on paper may not suffice, as far as the law is concerned. In fact, there are at least 20 factors that the IRS thinks you should consider when classifying workers.
IRS: Control is Key
The list of 20 factors, while not exhaustive, focuses on the most important detail when it comes to classifying workers: control. The more control an employer has over the worker, the more likely it is that the worker is an employee.
Here are the factors, according to the IRS, that indicate more of an employee relationship:
- Instructions. Independent contractors are typically not given instruction on how to perform work, while employees are.
- Training. Employees are usually trained, whereas independent contractors are not.
- Integration. Integration of the worker's services into the everyday business operations are an indicator of employee status.
- Services rendered personally. If the services are required to be performed personally, this is more an indication of employee status.
- Hiring, supervising, and paying assistants. If the worker has the power to hire and supervise assistants, then that suggests the worker is more of an employee.
- Continuing relationship. Employers and employees tend to have a more permanent relationship.
- Set hours of work. The employer usually controls the work hours for an employee.
- Full-time required. A worker who devotes services full-time to the business generally is more indicative of an employee.
- Doing work on an employer's premises.
- Order or sequence test. An employer typically dictates the order or sequence in which work is to be performed for the employee.
- Oral or written reports. Employees usually submit regular reports to the employer.
- Payment by the hour, week, or month.
- Payment of business and/or traveling expenses.
- Furnishing tools and materials. An independent contractor typically incurs his or her own costs for the work performed, while an employer furnishes the significant tools and materials of the job to the employee.
- Right to discharge. Employers usually have the right to discharge an employee.
- Right to terminate. If a worker has the right to terminate his employment without incurring liability, then that suggests the worker is more of an employee.
By contrast, here are a few factors that indicate a worker is more of an independent contractor:
- Significant investment. This refers to the investment an independent contractor has in his own trade. Contractors generally don't require the hiring company's facilities tools or equipment to get the job done.
- Realization of profit or loss. Realizing a profit or suffering a loss as a result of the services performed is usually more indicative of an independent contractor.
- Working for more than one firm at a time. Independent contractors, unlike employees, usually work for more than one employer at a time.
- Making services available to the general public. Independent contractors typically make their services available to the public on a regular basis.
Again, this list is merely a guide in determining how much control an employer has over a worker. Some factors may overlap, and the importance of each factor may vary, depending on the industry or specific occupation.
Bottom line: Know that you should be careful when hiring or working with independent contractors, because the IRS is cracking down on misclassifications. An experienced employment attorney can help you determine which classification is correct for your workforce.
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