IRS’ Questions to Determine Employment Status:

Employee or Independent Contractor?

The Internal Revenue Service takes seriously the erroneous and invalid use of "independent contractors." Employers can be fined for mis-classifying those who are really employees as independent contractors. The tax-critical issue? The IRS want the withholding it gets throughout the year on all employees, whereas independent contractors only pay the IRS when they file based on a 1099 the tax seas following the year in which they received payment for their services. In some cases, the IRS may not receive tax payments at all. The IRS wants its money…and it wants it now!

Employee versus independent contractor status is entirely a factual determination based on the degree of control exercised by the employer. IRS-problems can be minimized by only utilizing persons as independent contractors in positions that meet federal and state guidelines for independent contractor status.

Answers of "Yes" to any of the following questions support a finding of "employee" status.

  1. Is the individual, who is providing services, required to comply with instructions concerning when, where and how the work is to be done?
  2. Is the individual provided with training to enable him or her to perform a job in a particular manner?
  3. Are the services that are performed by the individual integrated into your business’ operations?
  4. Must the services be rendered personally by the individual?
  5. Does your business hire, supervise or pay assistants to help the individual performing the services under contract?
  6. Is the relationship between the individual and the person for whom he or she performs services a continuing relationship?
  7. Does the employer/company set the hours of work for the individual?
  8. Is the individual required to devote full time to the person for whom he or she performs services?
  9. Does the individual perform work on your business premises?
  10. Does the employer/company direct the order or sequence in which the work must be done?
  11. Are regular oral or written reports required?
  12. Is the method of payment at set intervals of regular amounts?
  13. Are business or traveling expenses of the individual reimbursed?
  14. Does the employer/company furnish tools and materials necessary for the provision of services?
  15. Does the individual performing services lack a significant investment in resources used to perform services?
  16. Is the individual providing the services without realizing a profit or loss from his services?
  17. Is the individual restricted from providing services for a number of firms at the same time?
  18. Has the individual not made his/her services available to the general public?
  19. Is the individual who is providing services, subject to dismissal for reasons other than non-performance of contract specifications?
  20. Can the individual providing services terminate his or her relationship at any time without incurring a liability for failure to complete a job?

In addition to the above considerations, the day-to-day relationship between the company and the independent contractor should be scrutinized periodically to insure that the services provided by the independent contractor have not drifted toward an employer-employee relationship. As with many other areas of employment law, vigilance is the key to successfully avoiding mis-classifying independent contractors as employees.