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An Analysis of IRS Guidelines
for Independent Contractor and Employee Status

[by Katz Cassidy]

Background

Whether a worker can be paid as an outside contractor or must be paid as an employee is an issue of significant importance to many of us when hiring someone to perform a service. The costs to both parties vary considerably depending on that determination.

IRS Classification Factors

The following list of IRS criteria establishes guidelines for determining employee versus outside contractor status and should be used to help evaluate your particular cases. Review these guidelines in terms of seeing where the majority of your answers falls.

  1. INSTRUCTIONS
    Employee -- Required to comply with the employer's instructions as to when, where and how he or she is to work.
    Independent Contractor -- Has right to follow own instructions.
  2. TRAINING
    Employee -- Required to be trained by an experienced employee to perform the work in a particular manner.
    Independent Contractor -- Does not require employer-provided training.
  3. INTEGRATION
    Employee -- Services are necessarily integrated into the business operations and the success or continuation of a business depends significantly upon the performance of these services.
    Independent Contractor -- Integration of services is not personally.
  4. SERVICES RENDERED PERSONALLY
    Employee -- Required to render services personally, implying the employer is interested in the methods used to accomplish the work.
    Independent Contractor -- Not required to render the services personally.
  5. HIRING, SUPERVISING AND PAYING ASSISTANTS
    Employee -- Hired, supervised and paid directly by the employer to perform services.
    Independent Contractor -- A worker who hires, supervises and pays his or her own assistants in order to help accomplish the work, indicating that the worker is responsible only for attaining a certain result.
  6. CONTINUING RELATIONSHIP
    Employee -- Maintains a continuing relationship with the employer, which may include instances where work is performed at recurring but irregular intervals.
    Independent Contractor -- A continuing relationship is not necessarily assumed to exist.
  7. SET HOURS OF WORK
    Employee -- Required to perform services within set hours of work established by the employer.
    Independent Contractor -- Hours of work established by the worker.
  8. TIME REQUIRED
    Employee -- Usually expected to devote full time to the business, implying that the worker is restricted from performing services for other businesses.
    Independent Contractor -- Free to work when and for whom he or she chooses.
  9. WORK PERFORMED ON EMPLOYER'S PREMISES
    Employee -- Performs the work on the employer's premises, especially when the work could be performed somewhere else. The importance of this factor depends on the nature of the service involved and the extent to which the employer requires that the worker perform the work on the employer's premises.
    Independent Contractor -- Work is performed, for example, at the worker's office.
  10. ORDER OR SEQUENCE SET
    Employee -- Required to follow the routines and schedules established by the employer.
    Independent Contractor -- Free to follow own pattern of work.
  11. ORAL OR WRITTEN REPORTS
    Employee -- Required to submit regular reports to the employer.
    Independent Contractor -- Not necessarily required to submit regular reports.
  12. SCHEDULED PAYMENT
    Employee -- Receives payment by the hour, week or month.
    Independent Contractor -- receives payment by the job or on a straight commission.
  13. PAYMENT OF BUSINESS AND/OR TRAVEL EXPENSES
    Employee -- Business and/or travel expenses are ordinarily paid by the employer, indicating that the employer retains the right to regulate and direct the worker's business activities.
    Independent Contractor -- Generally furnishes his or her won tools and materials.
  14. FURNISHING OF TOOLS AND MATERIALS
    Employee -- Tools and materials needed to perform the work are provided by the employer.
    Independent Contractor -- Generally furnishes his or her own tools and materials.
  15. SIGNIFICANT INVESTMENT
    Employee -- Lacks investment in the employer's facilities, indicating the worker's dependence on the employer for such facilities in order to perform the work.
    Independent Contractor -- Invests in facilities in order to perform the work, such as an office rented at fair value from an unrelated party.
  16. REALIZATION OF PROFIT OR LOSS
    Employee -- Cannot directly realize a profit or suffer a loss as a result of his or her services.
    Independent Contractor -- Subject to, for example, a real risk of economic loss due to investments, or liability expenses such as salary payments to unrelated employees.
  17. WORKING FOR MORE THAN ONE BUSINESS AT A TIME
    Employee -- Performs services for one person, or simultaneously for more than one person if such persons are part of the same service arrangement.
    Independent Contractor -- Performs services for a multiple of unrelated persons or businesses simultaneously.
  18. MAKING SERVICE AVAILABLE TO GENERAL PUBLIC
    Employee -- Services are available to only one employer at a time.
    Independent Contractor -- Services are made available to the general public on a regular and consistent basis.
  19. RIGHT TO FIRE
    Employee -- Employer has a right to discharge the worker and can exercise control on how the worker performs the work through the threat of discharge.
    Independent Contractor -- Cannot be fired so long as he or she produces a result that meets contractual specifications.
  20. RIGHT TO QUIT
    Employee -- Has the right to terminate his or her relationship at any time without incurring liability.
    Independent Contractor -- Can terminate services but only at the risk of, for example, financial loss or breach of contract litigation.

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