The following information has been taken from Federal Online Publications.
Various Federal and State Agencies are taking an interest in the “Misclassification of Workers” as independent contractors. Misclassified employees often are denied access to critical benefits and protections they are entitled to by law, such as the minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces. Employee misclassification generates substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers’ compensation funds. If you are unsure about how to classify workers in your business or venue, please refer to the following guidance:
The Internal Revenue Service is investigating abuses of the “independent contractor” designation by employers and citing employers for classifying workers as “independent contractors” when there is an employer/employee relationship. The Internal Revenue Service has published guidance regarding worker classifications and the tax rules as they apply to employees verses independent contractors.
According to the Internal Revenue Service, “the general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.
You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.
If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor, and your earnings are generally not subject to self-employment tax.
However, your earnings as an employee may be subject to FICA (Social Security tax and Medicare) and income tax withholding.
Independent Contractor (Self-Employed) or Employee? Common Law Rules In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
Facts that provide evidence of the degree of control and independence fall into the following categories:
1. Behavioral Control: Behavioral control refers to facts that 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 direct or control the way the work is done if the employer has the right to direct and control the work.
The behavioral control factors fall into the categories of:
• Type of instructions given
• Degree of instruction
• Evaluation systems
2. Types of Instructions Given: An employee is generally subject to the business’s instructions about when, where, and how to work. All the following are examples of types of instructions about how to do work.
• When and where to do the work.
• What tools or equipment to use.
• What workers to hire or to assist with the work.
• Where to purchase supplies and services.
• What work must be performed by a specified individual.
• What order or sequence to follow when performing the work.
3. Degree if Instruction: Degree of Instruction means that the more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee. Less detailed instructions reflect less control, indicating that the worker is more likely an independent contractor.
Note: The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.
4. Evaluation System: If an evaluation system measures the details of how the work is performed, then these factors would point to an employee. If the evaluation system measures just the result, then this can point to either an independent contractor or an employee.
5. If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way. This is strong evidence that the worker is an employee. Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship. However, independent contractors ordinarily use their own methods.
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination. For more information, please refer to the following guidance by the Internal Revenue Service:
If you need more information on how to comply with these rules, please contact Clear2Work for more information.