Independent Contractor vs Employee Classification
Should you hire your worker as an employee or independent contractor?
The IRS relies on three factors to determine whether a worker is classified as an independent contractor or employee as follows:
- Behavioral control. If your business has a lot of control over the worker’s day-to-day details of his/her work, such as specific instructions in your contract or through supervision then the worker should be classified as an employee. On the other hand, if the worker primarily decides how to perform the work, then can be classified as an independent contractor.
- Financial control. If the worker invested significantly in their business, has unreimbursed expenses and the possibility of incurring a loss, the worker can be classified as an independent contractor.
- Type of relationship. If the worker works exclusively for your company, plans to work there indefinitely; and get benefits such as a retirement plan, sick days, and medical benefits, then the work classification is employee.
When classifying a worker as an independent contractor ensure you have a good basis for this classification. Not only does the IRS not like this classification but also many states as taxes are not paid as one earns income. Keep up to date on the law changes.
Should your business be audited for misclassifying employees as independent contractors, you can use the Safe Harbor of Section 530 if you qualify. Section 530 is federal law. This federal law lets you treat your workers as independent contractors even when the IRS audits and finds that the workers are employees under common law.
Three Steps to Safe Harbor with Section 530
- You never treated any worker holding a substantially similar position as an employee.
- You consistently treated your individual worker as an independent contractor on all tax returns.
- You had a reasonable basis for treating your individual worker as an independent contractor.
If you have questions whether your worker can be classified as an independent contractor, please call Susan at 630.523.5762.