Self-Employed Contractor or Employee – IRS Provides Determination Assistance
One of the questions J&L receives the most often covers whether or not a worker should be considered a self-employed (contractor) or employee. Even though most ot the inquiries received involve the determination for Workers Comp, I have always recommended using the IRS rules. Why?
One reason is that the IRS has more of a national rule that many states follow to see if a worker should be considered self-employed or an employee. The IRS’s main concern revolves around Social Security and Medicare withholding. With many employers having multi-state operations, looking at just one state would not fit their situation.
Many articles appear in this blog that cover this subject well using the IRS rules. Please consider this article as more of an update. Check here for 15-A articles and here for Independent Contractor articles.
Yes, many states, such as California Courts, have made major decisions on whether a worker is a self-employed contractor or an employee. Still, the rulings consist of similar language as provided by the text in Publication 15-A. Please see the links at the bottom of this article for more info.
After receiving your company’s Wokrers Comp premium audit bill should not be the time to start considering who was an independent self-employed contractor.
Control Is Critical
The one word that stands out in the self-employed analysis comes from two concepts – Behavioral Contril and Financial Control.
From one of the IRS Publication 1779 – see the bottom of the article. Even though the publication was directed towards self-employed individuals, the info was golden.
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.
The IRS added sections under Behavioral Control – Instructions and Training. The sections under Financial Control consist of Significant Investment, Expenses, and Opportunity for Profit or Loss. The final section – Relationship of the Parties contains my final thoughts.
Self-Employed Contractor Cornerstone
The Relationship of the Parties contains a significant passage –
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.
Using contracts with a self-employed contractor remains the best advice.
Worker Classification 101: employee or independent contractor | Internal Revenue Service
Independent contractor (self-employed) or employee? | Internal Revenue Service
