Employee vs. Independent Contractor

Are you an independent contractor or do you use independent contractors for your business? Are you sure?

Before classifying a person as an independent contractor as opposed to an employee, be aware of the major issues surrounding the employee-independent contractor determination.

The consequences of the Internal Revenue Service (IRS) reclassifying a worker from independent contractor to employee can be devastating. The IRS can assess a penalty against the organization or any office deemed to be a responsible person for 100% of the total tax liability.

In other words, officers can be held personally responsible for non-payment of the employment taxes the IRS expected to collect. In a worst-case scenario, approximately 40% of what was paid to the reclassified worker could be assessed against the organization or officer (15% for federal income tax withholding, 15% for FICA taxes not withheld, 6% for unemployment taxes, plus interest and penalties).

The 20 Factors Test

The IRS, in Revenue Ruling 87-41, has developed a test to classify employee-independent contractor status. The factors and considerations pointing toward independent contractor status are as follows:

1. DEGREE OF CONTROL. The organization should not have the right to control the method or manner of the job to be performed.


2. RIGHT TO DISCHARGE. The organization cannot terminate the contractor as long as he or she meets his or her obligations under the contract.


3. RIGHT TO DELEGATE WORK. The contractor can bring in whomever he or she wants to accomplish the purpose of the contract.


4. HIRING PRACTICES. The contractor should have the right to hire and fire assistants that he or she uses in performing the contract.


5. PAYMENT PRACTICES. An independent contractor should be paid by the job as opposed to by the hour, week or month.


6. FURNISH TRAINING. The organization should not provide any type of training for inexperienced workers.


7. SKILL. Independent contractors are generally viewed as skilled workers.


8. DURATION OF RELATIONSHIP. The contractor should be hired for a specified time period. Continuous work implies an employee relationship.


9. CONTROL OVER HOURS OF WORK. An independent contractor should be allowed to set his or her own hours.


10. INDEPENDENT TRADE. The contractor should be free to work for any number of persons or firms simultaneously.


11. FURNISHING OF TOOLS. The contractor should be able to provide his or her own tools.


12. PLACE OF WORK. If possible, the independent contractor should perform his or her job off the organization's premises.


13. PROFIT AND LOSS. The contractor should have the opportunity for profit or loss.


14. INTENT OF THE PARTIES. The parties' intent to create an independent contractor relationship should be documented.


15. PRINCIPAL IN BUSINESS. The contractor should be a principal in his or her own business.


16. SEQUENCE OF WORK. The contractor should be able to determine the sequence of the work performed outside of the organization's control.


17. REPORTS REQUIRED. The contractor should not be required to submit regular oral or written reports or to attend organization meetings.


18. SAME WORK AS REGULAR EMPLOYEES. The organization should not have the independent contractor do the same type of work as its regular employees.


19. INTEGRATION. The organization should not engage an independent contractor to do something that is a part of the day-to-day operations of the company.


20. INDUSTRY CUSTOMS. The industry should have a definite custom regarding worker classification.