Accounting Articles > Payroll Tax Problems:

Employee versus independent contractor determination IRS common law rules

This question is a legal minefield. For every rule, there are several exceptions. Each taxation agency has a different set of standards.

Below is a list of questions that demonstrate a set of standards somtimes used in certain instances by The Internal Revenue Service to determine whether someone is an employee or an Independent Contractor.

In most current cases, however, The IRS looks at the nature of a business relationship, rather than a hard and fast list of questions, to determine status. This new development has lent itself to subjective interpretation which puts most employers into an even less defensible position.

The overall rule is that if there is any doubt whatsoever about the status of your workers, they should be classified as employees. Take out the applicable employee taxes. The easiest way for the IRS to put you out of business is to discover that you have treated employees as if they were independent contractors. At the end of the day, handling this issue properly will only cost you another eight to ten cents on the dollar in raw tax, and it very well could save your business.

Many clients make the mistake of thinking that an Independent Contractor Agreement signed by the worker will protect them. Please don't make this mistake. You could have an agreement the size of the Old Testament, prepared by the most influential law firm in the state, that says whatever it says. At the end of the day, The IRS probably won't even look at it. Instead, they'll assess the nature of the relationship.

All of that being said, if the answer to any one of these questions is yes, according to IRS Guidelines, a worker is probably an employee.

1. Is the worker required to comply with instructions about when, where, and how the work is done?
2. Is the worker provided training to enable him/her to perform a job in a particular manner?
3. Are the services provided by the worker an integral part of the business?
4. Must the services be rendered personally?
5. Does the business hire, supervise, or pay assistants to help the worker on the job?
6. Is there a continuing relationship between the worker and the person for whom the services are performed?
7. Does the recipient of the services set the work schedule?
8. Is the worker required to devote his/her full time to the person he/she performs services for?
9. Is the work performed at the place of business of the company or at specific places set by the company?
10. Does the recipient of the services direct the sequence in which the work must be done?
11. Are regular oral or written reports required to be submitted by the worker?
12. Is the method of payment hourly, weekly, or monthly (as opposed to commission or by the job?)
13. Are business and/or traveling expenses reimbursed?
14. Does the company furnish tools and materials used by the worker?
15. Has the worker failed to invest in equipment or facilities used to provide the services?
16. Does the worker perform services exclusively for the company rather than working for a number of companies at the same time?
17. Does the worker make his/her service regularly available to the general public?
18. Is the worker subject to dismissal for reasons other than non-performance of the contract specifications?
19. Can the worker terminate his/her relationship without incurring a liability for failing to complete the job?

Please play it safe. If you have any questions at all, please classify your workers as employees and remit the applicable payroll taxes.