The problem of misclassifying workers is so rampant that the federal government has enacted a new multi-agency misclassification initiative to bring in past-due revenue. Every business should understand governmental definitions, in addition to the rules and regulations regarding worker classifications in order to minimize penalties and/or mitigate the risk of exposure in a private lawsuit. Learn how to better differentiate between employees and independent contractors to help protect your business.
For independent contractors, the IRS will look at the relationship between your business and the worker. The degree of control and independence of the worker are keys in determining classification. The IRS generally looks for evidence of the degree of control in three categories: behavioral control, financial control, and the type of relationship. For example:
- Who has the right to control and direct what work is done and how it's done? Do you tell the person what needs to be done and instruct him or her on how to do it?
- Who supplies the tools and equipment?
- Is the individual responsible for paying their own payroll taxes?
- Who has control over the pay involved? Do you pay for any employee-type benefit such as vacation and/or sick pay, insurance or pension plan?
Please note: No one factor is determinative, and you may not be able to determine whether an individual is an employee or an independent contractor using these factors alone.