It’s no secret that hiring independent contractors can save companies a great deal of money compared to hiring employees. A company can avoid paying payroll taxes, benefits, unemployment insurance, workers’ compensation, and disability by hiring independent contractors instead of employees. However, just because an organization wants to call someone an “independent contractor” does not necessarily mean that they are an independent contractor in the eyes of the law.
When determining whether or not a worker is an independent contractor or an employee, the IRS will examine the level of control and independence in three areas: Behavioral, Financial, and Type of Relationship.
With respect to the Behavioral aspects, the key is the level at which the company controls what the worker does and how they do it. Is the worker told when, where, and how to work? If so, the level of control in the Behavioral context may suggest an employer/employee relationship. Independent Contractors are typically free to choose when and how they work, so long as the task is completed in a timely fashion or meets a specific deadline.
In terms of the Financial aspects, the IRS looks at the level of control that the payer has over the business aspects of the worker. How is the worker paid? Who provides the supplies? Typically, an employee will receive an hourly wage or a salary and have all of their tools/supplies provided by the employer. An independent contractor is typically paid on a per-project basis and provides all of their own tools/supplies.
The Relationship aspects will also be examined. Are contracts or benefits involved? Is the relationship long-term or short-term? Is the work at issue a key aspect of the payer’s business? A long-term, contractual relationship that involves key aspects of the payer’s business will typically suggest an employer/employee relationship. Independent contractors are typically hired on a short-term basis with no benefits and (typically) perform work that is not central to the payer’s business.
An important thing to keep in mind is that whether your workers are classified as independent contractors or employees can change the level of culpability that you have for their actions. That is outside the scope of this topic, but will be covered in my next blog. Stay tuned!
Joseph Violi is a guest blogger. Please contact the attorneys at Demorest Law Firm, PLLC (www.demolaw.com) if you would like more information on this topic.
