Independent Contractor Vs Employee Status

Independent contractor or employee? Determining this status is a high stakes strategy. Independent contractors get paid the gross amount owed to them or their company and it’s a total business expense to the contractor without payroll tax deductions. Employees, on the other hand, have federal and state taxes deducted and paid for by both the employer and themselves, the employee. Approximately 7-8% of the payroll is paid out for taxes by the employer and the same amount by the employee. Thus, many creative business owners contrive every possible way to satisfy the requirement and create independent contractor status for what would normally be employee situations.

There is an IRS form that can be submitted in which the service predetermines whether or not an individual is an employee or an independent contractor, although the forms and decisions made are one-sided, leaning towards the idea that everyone is an employee with the exception of licensed and regulated professionals and bona fide business enterprises. The general test is the degree of control the alleged employer has over both the process and the conclusion delivered by the alleged employee. The more control over the would-be independent contractor, the less likelihood that independent contractor status will be established and the more likely he will be deemed an employee by the IRS.

Hiring an independent contractor is a huge opportunity to avoid paying not only payroll taxes, but also workman’s compensation insurance and other benefits that come with employee status including health insurance and vacation and holiday time, overtime, etc. It is also a situation that is frequently contested by the IRS and frequently lost by the employer when independent contractor status is claimed but eventually denied. Therefore, this is a strategy to be implemented carefully and knowledgeably by the parties involved after serious consideration to the facts.

Here are some of the considerations that determine whether a worker is an employee or an independent contractor:

1. Who controls the time, place and dates of work.

2. Who owns the equipment used by the worker and who maintains/replaces it.

3. Who determines how the job is done, what materials are used, who hires and controls the subcontractors and service providers.

4. Who determines how the process is accomplished, who designs the tools used and who determines what the results should be.

5. How the payment for services is assessed.

6. Whether the worker has other clients and makes his own schedule.

7. If there is a professional skill involved, a professional business organization and a written contract.

8. If there is any risk or investment or chance for loss involved on the part of the worker.

9. Whether the worker has his own letterhead, billing system, etc.

As you can well imagine, every prudent businessperson would prefer to have his employees redefined an independent contractors. However, the IRS has the opposite in mind and thus the battle lines are drawn. Control is the issue and the burden falls on the employer to prove that the appropriate level of control is in the hands of the worker when bestowing independent contractor status on him, thus no longer requiring tax deductions and insurance payments.

Be prepared to argue divested control and organize yourself accordingly. The more effort put into the response the better the result will be. In the end, the truth will usually be reflected in the outcome. If the employee controls his working environment he will be awarded independent contractor status, although it is definitely an uphill battle.