vs. Independent Contractor
IRS contends that over 300,000 employers improperly
classify employees as independent contractors. Approximately 750
IRS revenue officers are conducting "special" audits to
Why be an
- For the employer-saves on employer's share of
payroll taxes, employee benefits, workman's compensation
insurance, increased unemployment tax rates, and payroll
- For independent contractor-makes own tax
payments, deducts business expenses in full without
Schedule A limitation, and may have a Keogh plan.
Note: The general rule with respect to
an independent contractor is that the "employer" has
the right to control only the result of the person's work.
Here are the famous 20
factors of sufficient control to determine if the worker is an
employee or Independent contractor:
- Instructions-Employees are given instructions as
to when, where and how to do their work.
- Training-Independent contractors use their own
methods. Employees are provided training that enables
them to perform in a particular manner.
- Integration-Employee's services are integrrated
into the business operations.
- Services Rendered Personally-Employees can't
subcontract out work.
- Hiring Assistants-Independent Contractor can
hire, supervise, and pay his own assistants, Employees
work with assistants hired by the company.
- Continuing Relationship-Employees have a
continuing relationship with employer.
- Set hours of work-An Independent Contractor is
the master of his own time. Employees follow a schedule
set by their employer.
- Full Time Work-Independent Contractor can work
when he chooses.
- Work Done on Premises-Employees work where
designated by employer.
- Order of Sequence set-Employees must work in the
sequence set by the employer.
- Reports-An employee submits reports to employer.
- Payments-Independent Contractors are paid by the
job or by output. Employees are paid by the
- Expenses-Employees are reimbursed by employer for
- Tools and Materials-Employees are furnished
needed materials by employer.
- Investment-Independent Contractor has a
significant investment in the facilities he is using.
- Profit or Loss-Independent Contractors earn a
profit or loss. They take the risk and the reward.
- Works for multiple firms-Independent Contractors
provide their services to more than one person at the
same time. Employees perform their services exclusively
for one employer.
- Offers services to general public-Independent
Contractor makes his services available to the general
- Right to Fire-Independent Contractor can't be
fired, so long as he is performing to specifications in
- Right to quit-Employees can quit their job at any
time without incurring liability for failure to complete
This list looks impressive. Please don't memorize
these. They don't always apply! For instance, if you look at Per
Diem Accountants, at times, they certainly look like employees.
There are industry-specific exceptions to this set of rules. It
is common in the Accounting profession to pay by the hour. This
does not make the worker an employee. There are other professions
with exceptions. This is still a gray area in tax law, check with
a professional concerning your profession.