Tax season is upon us, bringing with it the usual confusion and anxiety over what we can and cannot do to minimize our tax burden. One familiar topic that is often scrutinized in a tax controversy is the question of independent contractor versus employee.
If you are a business owner utilizing the services of others, you’ll want to be very careful to ensure their status as an independent contractor is solid, or risk heavy penalties.
If you are providing services to others, if they are placing requirements on you that move you from the category of independent contractor to the category of employee, then you may be entitled to additional compensation.
What does the IRS look for when making the independent contractor determination?
The IRS will look to a number of factors in determining whether someone is an independent contractor. This is often known as the 20-factor test. This test looks at the relationship between the business and the worker, primarily the degree of control and independence present in the relationship. These factors are broken down as follows:
- Behavioral Control
- Financial Control
- Relationship of the Parties
In analyzing if a worker is an independent contractor or an employee, the IRS will look at whether the business has the right to direct and control the work that is done and how it is accomplished. The existence of extensive training or instruction will swing the pendulum in the direction of employee.
This factor looks at the extent that the business has the right to direct or control the financial or business aspects of the worker’s job. Facts that might lead to a determination of employee include:
- The business provides all tools of the worker
- The worker only performs services for one business
- The worker is paid regularly on an hourly basis
- The worker has the potential to make a profit, but not a loss
Relationship of the Parties
Finally, the IRS will look at the type of relationship the business has with the worker. If the following factors exist in the relationship, you may be looking at an employment relationship, rather than an independent contractor relationship:
- The business provides employee-type benefits
- The worker provides services that are integral to the regular business of the company
- The worker is required to work set hours at a particular location
Business Risks in Misclassifying Independent Contractors
If the IRS determines that you have misclassified an independent contractor without a reasonable basis for doing so, you may be liable for employment taxes for that service provider.
Workers how think they may be misclassified as independent contractors can use Form 8919 to figure and report the employee’s share of uncollected Social Security and Medicare taxes due.
If you have questions about the status of any of your services providers or your own status as a service provider, contact us today for a consultation.
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