Do things seem a little hazy? Like the picture above, knowing whether that new hire is an employee or an independent contractor can be a little fuzzy. However, mistakenly classifying an employee as an independent contractor can result in significant fines and penalties. There are 20 factors used by the IRS to determine whether you have enough control over a worker to be an employer. Though these rules are intended only as a guide-the IRS says the importance of each factor depends on the individual circumstances-they should be helpful in determining whether you wield enough control to show an employer-employee relationship.
Checklist for Independent Contractor Status
Listed below you will find the a slew of factors with brief explanations of how to interpret each factor. If you answer “Yes” to all of the first four questions, you’re probably dealing with an independent contractor. If you answer “Yes” to any of questions 5 through 20 means your worker is probably an employee.
4 Essential Independent Contractor Tests
In order to be considered an independent contractor you MUST answer “Yes” to the following Items:
- Profit or loss: Can the worker make a profit or suffer a loss as a result of the work, aside from the money earned from the project? (This should involve real economic risk-not just the risk of not getting paid.)
- Investment: Does the worker have an investment in the equipment and facilities used to do the work? (The greater the investment, the more likely independent contractor status.)
- Works for more than one firm: Does the person work for more than one company at a time? (This tends to indicate independent contractor status, but isn’t conclusive since employees can also work for more than one employer.)
- Services offered to the general public: Does the worker offer services to the general public?
Other Tests of Independent vs Employee
To further determine if you might be at risk of having a contractor be considered an Employee by the IRS, you should evaluate him/her based on the following: Continue reading