Its good to periodically check in with the IRS with regard to the rules governing Independent Contractors or ICs. Due to rapidly evolving roles regarded as ICs – many of which emanate from tech advancements like the rise of application-based roles like Uber and others – it is a wise practice to stay abreast of how the IRS rules governing ICs is evolving to meet the changing nature of IC work.
The standard and historic definition of an “Independent Contractor” provided by the IRS says, “People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.”
However, since as noted, there are many emerging varieties of roles that could possibly be characterized as IC roles, hiring authorities should dig a little bit deeper to make their classification determinations so as to avoid challenges.
For federal employment tax purposes, common law rules are applied to determine if a worker is an independent contractor or an employee. Under the common law, hiring agencies should analyze the nature of any relationship between a worker and their business and assess the degree to which control and independence between parties is regarded. The things to examine when making this determination fall into three categories – Behavioral Control, Financial Control, and Relationship of the Parties.
Behavioral control assessments should focus on the extent to which a business controls a worker’s schedule, work hours, training and other instructions. Typically, an IC is not required to work regularly scheduled hours or to take direction on a regular basis the way a W2 employee does.
Financial control assessments look at the facts surrounding how much the business directs or controls financial and business aspects of a worker’s activity including, whether a worker incurs unreimbursed expenses on behalf of the business; whether the IC worker makes his/her services available to other businesses in the market; how the business pays the worker (with or without tax withholding); and the extent to which an IC worker can realize profits or incur losses.
Relationship between the parties is assessed by examining certain facts that govern the business relationship between an IC and a business. If a worker is legitimately classified as an IC, there should be written contracts describing the nature of the relationship. Most often, the business does not provide employee-type benefits like insurance, retirement, or PTO. Generally, IC relationships are not intended to be permanent and the type of work performed by an IC is considered to be regarded as a core function of the regular business of the company.
IC misclassification can be a costly liability for a growing business and should not be an afterthought. Let nextSource guide you in developing a viable IC classification process and policy.