IRS Compliance Checks

Classifying Workers

The independent contractor issue has been batted around for years. Independent contractors are a hot issue for the IRS because the potential for an agent to raise considerable revenues is significant. If you have no reasonable basis for classifying an employee as an independent contractor, you may be held liable for employment taxes for that worker-and not only the employer portion of the payroll taxes, but the employee's portion as well. You can also be charged penalties and interest.

Resource Guide

Don't let compliance checks scare you away from using independent contractors. Read Hiring An Independent Contractor for more information on this taxing topic.

Plunge into the world of small-business taxes with

Tax Savvy For Small Business: Year-Round Tax Strategies to Save You Money, 4th Edition by Frederick W. Daily
Tax Guide 2001: CCH Business Owner's Toolkit by Susan M. Jacksack
Finance and Taxes for the Home-Based Business by Charles Lickson and Regina Preciado
J.K. Lasser's Taxes Made Easy for Your Home-Based Business by Gary W. Carter

Establishing whether a worker is an independent contractor or not comes down the facts and circumstances of the worker's relationship to your business. Rather than going through a litany on the 20 common law factors (which can be found in IRS Publication 15a) for determining a worker's status, I'll focus on the two central issues addressed by these factors-control and risk.

Control basically boils down to whether you tell the worker when to show up, what to do, how to perform, what sequence the work is to be performed, and/or if you provide training relative to the work. Risk involves whether:

  • the worker is compensated hourly, as in a wage payment, vs. a flat fee for the job;
  • the worker performs the same services for other businesses;
  • he or she incurs unreimbursed business expenses;
  • and the extent of the worker's investment in their own equipment and other supplies to perform their duties.

The bottom line is this: If a worker isn't hanging out their "shingle" to perform the same duties for others, it'll be difficult to classify that person as an independent contractor. Workers who actively manage their own business where you don't exercise control over their "comings and goings" will most likely qualify as independent contractors. It's the gray area in the middle where most businesses get into trouble.

The IRS definitely has a bias toward classification of workers as employees. Caution should be exercised when classifying virtual employees as independent contractors. But when you have a legitimate basis for classifying a worker as an independent contractor, go ahead.

« Previous 1 Page 2
Loading the player ...

Mark Cuban's 12 Rules for Startups

Ads by Google

Share Your Thoughts

Connect with Entrepreneur

Most Shared Stories