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Independent Contractor or Employee?

If your business uses independent contractors as part of its work force, then depending on the circumstances, the IRS might reclassify these workers as employees. Such a reclassification could expose your business to employment taxes and penalties. In addition, your business might be responsible for retroactive fringe benefits for any reclassified workers.

One of the best ways to avoid this possibility is to have a properly drafted independent contractor agreement with all such workers and to carry out the terms of the contract. Of course, a good contract also helps protect your business from the actions of these workers.

With respect to employment taxes, penalties, and interest, the IRS considers at least 20 factors in classifying workers as independent contractors or employees. Here are just a few examples:

  • Where the worker’s services are available to the general public, as well as to the business, this generally indicates independent contractor status. Where the worker provides his services exclusively to the business, this generally indicates employee status.
  • Where the business does not have a general “at will” right to discharge the worker (that is, where the business is committed to use the worker for a set period of time or for a certain project), this generally indicates independent contractor status. Where the business can discharge a worker “at will,” this generally indicates employee status.
  • Where a business does not require a worker to perform services on the business’s premises, this generally indicates independent contractor status. Where a business requires a worker to perform services on the business’s premises, this generally indicates employee status.
  • Where payment is made by the job or on a straight commission, this generally indicates that the worker is an independent contractor. Where payment is made by the hour, week, or month, this generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying an amount that was agreed upon as the cost of a job.
  • Where the business does not provide training to the worker, or where the business hires the worker contemplating that the worker is already trained for the specific task, this generally indicates independent contractor status. Where a business provides training to the worker, this generally indicates employee status.

The absence or existence of any of these factors alone in not determinative of the workers status. Instead, all the factors are examined and weighed in their totality.