As a business owner, whether your workers are found to be employees or independent contractors will have great impact in determining your business’ taxes and legal liability issues. As far as taxes, this determination will affect your business’ federal and state income and employment taxes, U.S. Department of Labor and state counterpart agencies taxes, and more. There are also pension and fringe benefit issues, and workers’ compensation issues for employees (and not independent contractors). As far as legal liability, acts of your employees will cause liability to your business and affect your relationship with private parties and insurance companies.
To assist your business in determining these classifications, the IRS recently issued IRS Publication 1770 that provides a template focused to assist businesses on evaluating whether the status of their employees/independent contractors is accurate. A copy of this template is available at http://www.irs.gov/pub/irs-pdf/p1779.pdf.
In this IRS publication, the IRS examined three areas to determine worker classification: (1) behavioral control; (2) financial control; and (3) the relationship of the parties.
Behavioral Control: When examining behavioral control, the IRS focused on facts that show whether there is a right to direct or control how the worker does the work. The IRS states that 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, if your business provides extensive instructions, or training, to your workers on how work is to be done, this suggests that your workers are an employee. The IRS notes that such 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 your business provides little instructions about what or how it should be done to your workers, then your workers may be an independent contractor..
Financial Control: When examining financial control, the IRS focuses on facts that show whether there is a right to direct or control the business part of the work. For example, if your business reimburses your workers for some or all of their business expenses, then your workers are likely to be considered employees. However, if your workers make significant investments in their work, including paying for their own incurred expenses, as well as having an opportunity to realize a profit or incur a loss, then this suggests that your workers are independent contractors.
Relationship of the Parties: When examining relationship of the parties, the IRS focused on facts that illustrate how your business and your workers perceive their relationship. For example, if your business provides benefits to your workers, such as insurance, pension, or paid leave, then this is an indication that your workers are employees. However, the IRS notes that providing benefits is not a determinative factor, and just because your business does not provide benefits to your workers does not determine alone whether they are employees or independent contractors.
Additionally, the IRS will put great weight on written contracts between your business and its workers because such contracts likely show what both your business and your workers intended. This may be very significant if it is difficult, if not impossible, to determine status based on other facts. As a result, written contracts are always highly recommended with your workers.
Ultimately, if your business does not accurately classify your workers as either employees or independent contractors, it is highly likely that there will be a future investigation by IRS, Department of Labor, state labor and employment boards, unemployment insurance and worker’s compensation authorities that will verify or correct your status classification of your workers. If you classification is incorrect, then it will be expensive to your business in taxes, late fees and other related liability issues.
The Parents Estate Planning Law Firm, PC
