What Are the IRS Rules Surrounding Contractual Employment?
An independent contractor is a person or a business that performs services, produces outcomes, or produces products for a business under a written or implied agreement or contract. The independent contractor is not subject to the client's control or direction, except as stated in a contract.
The independent contractor decides how to provide the contracted services and negotiates deadlines and deliverables.
The expected outcome of the contract may be as specific as two 250 page books or as loose as general assistance and training help to convert the organization to a team-based workplace.
While the company contracting for his or her services can set the outcomes and the final products, they cannot tell the contractor how, when, or where to do the work. The independent contractor determines his hours of work, work site, and equipment.
The independent contractor provides the contracted services independently, not as an employee. The contracting agency does not control whether the contractor subcontracts a portion or all of the work to subcontractors.
The independent contractor pays his or her own taxes and Social Security. Contractors handle their own relationship with the Internal Revenue Service (IRS) by using the appropriate forms and procedures.
Most contracts specify that the contractor is not an employee and, as such, is not eligible for any benefits, perks, or privileges that the employer might provide for employees including health insurance, 401(k) deposits, company events, or pet insurance.
Employers rarely offer office space to independent contractors; usually, they set aside a conference room for training, consultations, and meetings. They may offer a company email address to facilitate communication between their employees and the contractor.
The business that engages an independent contractor is not liable for the acts or omissions of the independent contractor.
Another test of the status of an independent contractor is whether they perform work for more than one business; the independent contractor should.
Internal Revenue Service (IRS) Guidance
According to the Internal Revenue Service (IRS): "The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done."
Factors that provide evidence of the degree of control and independence of the contractor fall into three categories.
- "Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- "Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- "Type of Relationship: Are there written contracts or employee-type benefits (for example, pension plan, health insurance, vacation days pay, and so forth)? Will the relationship continue and is the work performed a key aspect of the business?"
If an employer can answer these questions appropriately, the relationship with the independent contractor is not an employment relationship.
Rather a contractual arrangement exists.
Employers must weigh all of these factors when deciding whether a contractor is an employee or independent contractor. There may be elements of each in the work the contractor is performing. Hard and fast rules don't exist for when an individual is deemed a contractor.
No one factor stands alone in making this determination. Also, factors that are relevant in one situation may not be relevant in another. If the employer concludes that he is unable to decide upon the appropriate classification, consult the IRS for a determination.
The keys are to look at the entire relationship and consider the degree or extent of the contracting agency's right to direct and control the contractor's work.
Finally, document each of the factors used to determine the classification to prepare for a possible, eventual challenge.
Susan Heathfield makes every effort to offer accurate, common-sense, ethical Human Resources management, employer, and workplace advice both on this website, and linked to from this website, but she is not an attorney, and the content on the site, while authoritative, is not guaranteed for accuracy and legality, and is not to be construed as legal advice.
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