IRS Worker Classification Issues: Employee or Independent Contractor?

IRS and Case Law Factors Involved In Determining Whether A Worker Is an
Employee or Independent Contractor

Overview

The determination as to whether a worker is an employee or an independent contractor can have far reaching tax implications for both the worker and the employer.

In addition, eligibility for employer fringe benefits are controlled by this determination.

This determination becomes more vital in light of the voluntary worker classification program offered by the IRS. This program allows many employers to resolve past worker classification issues with the IRS. For a detailed discussion of this new IRS program please read Employers Playing Tax Games with Workers: IRS Offers Way to Come Clean.

Factors That Determine Worker Classification:

The following briefly discusses the factors that are looked to in determining whether a worker is an employee or an independent contractor:

Behavioral

Does the company control or have the right to control what the worker does and how the worker does his or her job?

Financial

Are the business aspects of the worker’s job controlled by the employer? Some of the factors to examine are the following:

• How worker is paid
• Whether expenses are reimbursed
• Who provides tools/supplies, etc.

Type of Relationship

Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)?

Will the relationship continue and is the work performed a key aspect of the business?

Weighing the Factors

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor.

No One Factor is Determinative and Each Situation is Unique

There is no magic here. However, the following guidelines appear to be universal in all situations:

• There are no set number of factors that makes the worker an employee or an independent contractor.
• No one factor stands alone in making this determination.
• Factors which are relevant in one situation may not be relevant in another.

Keys To Determination

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

IRS Revenue Ruling 87-41 Provides 20 Factors To Determining Employee Status Under Common Law

This IRS Revenue Ruling 87-41 provides 20 factors to help determine whether sufficient control is present to establish an employer-employee relationship. The 20 factors have been developed based on an examination of cases and rulings considering whether an individual is an employee. Some basic considerations from this pronouncement are as follows:

• The degree of importance of each factor varies depending on the occupation and the factual context in which services are performed.
• The 20 factors are not to be applied blindly. Rather, they are to be used as an aid in applying the common law.
• Although a variety of factors may be used to analyze employment status for tax purposed, the regulations provide that employer control over the manner in which the work is performed is probably the most important.
• The test is not the actual control by the employer but the employer’s right to control.

For a complete listing and discussion of these 20 factors please see Employee Status Under Common Law: Rev. Ruling 87-41: 20 Factors

IRS Form SS-8

This form allows a taxpayer to submit their particular factual situation to the IRS for a determination of the employee/independent contractor status. A ruling usually takes about 6 months. It is also helpful and instructive to review this Form SS-8 since it lays out many detailed factors that the IRS looks to if you were to request a ruling from them on this issue.

Warning:

Please understand that the above is merely an overview of the issues involved in this complex area. The correct determination of this worker classification issue for an employer will depend upon an analysis of their unique and particular factual situation. Please do not hesitate to contact our office if you have any questions or need our assistance.

Steve is an excellent corporate attorney who has a deep understanding of corporate law, taxes and estate planning. He’s been extremely helpful to me in keeping my many companies and business ventures organized, focused and squeaky clean. He’s very strong in estate planning and wealth preservation as well. Finally, his follow through is air tight and utterly dependable.

Top Qualities: Personable, Expert, On Time. Retained in 1994 and continuously thereafter.

Fred Marshall, February 27, 2009