I often get asked if a worker is an employee or independent contractor. There is no set rule on this, but there are many factors that the IRS will look at in order to correctly categorize the worker. Each situation is unique and should be looked at by a tax professional.
If you have someone who is actually an employee, who you are categorizing as an independent contractor, you are at risk of the worker being reclassified to an employee, and having to pay the penalties and interest on the payroll taxes. Below is a list of different factors the IRS will look at when determining if a worker is an employee or independent contractor.
Factors that tend to show a person is considered an employee to the IRS:
- The worker follows instructions about when, where, and how to work.
- The worker is trained by the employer to perform services in a particular way.
- The work’s services are integrated into the business operation.
- The worker cannot subcontract work out to someone else.
- Assistants are hired by business not the worker.
- The worker has specific hours.
- The worker devotes a substantial amount of time to the business.
- Work is done on the business premises.
- The worker submits reports regularly.
- The worker is paid by hour, week, or month, unless amount was agreed based on a lump sum from the job.
- The business pays the worker’s business or other expenses, such as travel.
- The business furnishes the worker’s tools, equipment, and materials.
- The business can fire the worker and the worker has the right to quit at will.
Factors that tend to show a person is considered an independent contractor to the IRS:
- The worker hires, supervises, and pays his own assistants.
- The worker is free to work when and for whom she or he wants.
- The work is done on the worker’s premises.
- The worker is paid by the job or on straight commission.
- The worker has the risk of profit or loss.
- The worker does work for several businesses at one time.
- The worker’s services are available to the general public.
- The worker can’t be terminated early, except for breach of contract.
If you have any questions regarding how to categorize your workers, or are looking for a Las Vegas CPA, Please feel free to give me a call at 702 675-3524 or e-mail at michael@michaeljohnsoncpa.com.