Proper Worker Classification
Classifying a worker as an independent contractor rather than as an employee Under the common law rules cited in IRS rulings, an employee-employer relationship . Transfer the independent contractor payments to salary and wages and. Generally, a worker who performs services for an employer is an employee if the employer of the 20 factors set forth in Internal Revenue Service Ruling ”. can exercise enough control to establish an employer-employee relationship. Under the common law test, an employment relationship is established . I.R.S. Publication A, Employer's Supplemental Tax Guide, (), available at . which workers can draw benefits regardless of switching jobs.
A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised.
Behavioral control categories are: Receiving the types of instructions in these examples may indicate a worker is an employee. Degree of instruction, more detailed instructions may indicate that the worker is an employee.
Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor. Evaluation systems measuring just the end result point to either an independent contractor or an employee. Independent contractors ordinarily use their own methods.
Does the business have a right to direct or control the financial and business aspects of the worker's job? Unreimbursed expenses, independent contractors are more likely to incur unreimbursed expenses than employees. Services available to the market. Independent contractors are generally free to seek out business opportunities. Many companies believe that they can choose whether to treat any given worker as an employee or independent contractor.
However, there are laws that determine whether the worker is an employee or an independent contractor. So the first step is to properly classify the worker. An employee is an individual who performs services for you, and who is subject to your control regarding what will be done and how it will be done.
If the employer retains the right to direct and control the means and details of the work, then the worker is an employee. We call this the right to direct and control.Workers' Compensation: The Employer / Employee Relationship
It is the only definition, outside of court cases, you will find, and it can be found in Treasury Regulations Section Remember this term, right to direct and control, because you will hear it throughout this presentation. In contrast, an independent contractor is an individual who performs services for you, but you control only the result of the work, not the means and methods of accomplishing the result.
The information that we are covering is discussed in the Publicationtitled Independent Contractor or Employee, and is available on the IRS Web site. Employee versus Independent Contractor IRS Revenue Ruling contains factors, commonly referred to as the twenty common law factors, that assess whether or not a business has the right to direct and control the actions of the worker.
Although this revenue ruling is still valid today, the IRS has grouped the more relevant ones into three main categories of evidence that show whether a worker is an employee or an independent contractor: Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. Also, factors that are relevant in one situation may not be relevant in another. The key is to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
Employee or Independent Contractor?
Next we will look at each of these factors in more detail. The key issues for behavioral control are instructions and training. Types of instructions include things like: When and where to do the work What tools or equipment to use What workers to hire or to assist with the work Where to purchase supplies and services What work must be performed by a specified individual, and What order or sequence to follow when performing the work You would also want to consider the degree of instruction.
The more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.
The next factor under behavioral control is the evaluation system. If an evaluation system measures the details of how the work is performed, then these factors could point to an employee. On the other hand, if the evaluation system measures just the end result, then this could point to either an independent contractor or an employee.
Training means explaining detailed methods and procedures to be used in performing a task. If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way.
This is strong evidence that the worker is an employee. Periodic or ongoing training about procedures and methods is even stronger evidence of an employer-employee relationship. When looking at behavioral control, the key factor to consider is whether the business retains the right to control the worker and the details of how the services are performed, regardless of whether the business actually exercises that right.
A plumber agrees to install plumbing in a new warehouse being built. Upon arriving at the warehouse, the plumber is given the building plans showing where the plumbing is to be installed, and advised that the plumbing must be completed within five days. This is direction of what is to be done, rather than how it is to be done and is consistent with independent contractor status. The warehouse general contractor tells the plumber what plumbing has to be done, gives specific instructions on installation, the tools to use, the type of pipe to use, and the order and sequence in which the plumbing is to be installed.
These are specific instructions on how the work is to be performed and are consistent with employee status. Now let's look at the second category of evidence, financial control.
An independent contractor often has a significant investment in the equipment he or she uses in working for someone else. However, in many occupations, such as construction, workers spend hundreds of dollars on the tools and equipment they use and are still considered to be employees.
Employee or Independent Contractor? | Virginia Employment Commission
There are no precise dollar limits that must be met in order to have a significant investment. Furthermore, a significant investment is not necessary for independent contractor status as some types of work simply do not require large expenditures. Employers are more likely to reimburse employees for their job expenses, while businesses usually do not reimburse independent contractors for expenses.
However, employees may also incur expenses that are not reimbursed. A teacher buys erasers, posters and other minor supplies throughout the year. She is not reimbursed for these expenses, but minor expenses incurred by an employee do not indicate an independent contractor relationship.
She is an employee. The opportunity to make a profit or loss is another important factor. If a worker has a significant investment in the tools and equipment used and if the worker has unreimbursed expenses, the worker has a greater opportunity to lose money — for example, their expenses will exceed their income from the work.