New IRS Subcontractor Rules Revisited Each Tax Year

The New IRS Subcontractor rules now contains a helpful brochure better known as Publication 1779.    As with the prior year, the three areas that determine whether a subcontractor should be reported as an employee are:

• Behavioral Control
• Financial Control
• Relationship of the Parties

The new IRS Subcontractor rules actually repeat what it posted last year.   This may not actually be the exact determinations by a Workers Comp Board or premium auditor.   However it is a great starting point.

The most important point, in my opinion, is having a written contract that spells everything out. 

The three main bullet points are covered below.   The latest update to all this information was Dec 28th, 2017.  That date makes this information rather fresh.

Behavioral Control

These facts show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.

For example:

Instructions – if you receive extensive instructions on how work is to be done, this suggests that you are an employee. Instructions can cover a wide range of topics, for example:

• how, when, or where to do the work
• what tools or equipment to use
• what assistants to hire to help with the work
• where to purchase supplies and services

If you receive less extensive instructions about what should be done, but not how it should be done, you may be an independent contractor. For instance, instructions about time and place may be less important than directions on how the work is performed.

Training – if the business provides you with training about required procedures and methods, this indicatest hat the business wants the work done in a certain way, and this suggests that you may be an employee.

Financial Control

These facts show whether there is a right to direct or control the business part of the work.

For example:

Significant Investment – if you have a significant investment in your work, you may be an independent contractor. While there is no precise dollar test, the investment must have substance. However, a significant investment is not necessary to be an independent contractor.

Expenses – if you are not reimbursed for some or all business expenses, then you may be an independent contractor, especially if your unreimbursed business expenses are high.

Opportunity for Profit or Loss – if you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an
independent contractor.

Relationship of the Parties

These are facts that illustrate how the business and the worker perceive their relationship.

For example:

Employee Benefits – if you receive benefits, such as insurance, pension, or paid leave, this is an indication that you may be an employee. If you do not receive benefits,however, you could be either an employee or an independent contractor.

Written Contracts – a written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts.

This webpage covers the new IRS subcontractor rules in depth.

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