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Are my workers employees or independent contractors?

A good bookkeeper knows a key tenet of limiting potential problems with the Internal Revenue Service is categorizing employees properly to pay them correctly.

Sometimes areas of uncertainty surround a worker’s status. The employer determines the degree of control he or she maintains over a worker (or the degree of independence provided the worker). The general rule established by the IRS states an individual is an independent contractor if the payer controls or directs only the result of the work; not what or how it gets done.

Unfortunately, no explicit rules exist to define “directing only the result of the work,” so consider the following factors:

  • Does the employer hold “behavioral control” over the worker?
    • Employers usually decide how, when, and where employees’ work will be done, while independent contractors usually exercise more flexibility.
    • A worker needing little or no instruction may be an independent contractor.
    • Independent contractors are usually responsible for their own training, while an employer is normally responsible for an employee’s.
    • The ability to hire assistance may suggest an independent contractor.
  • How are expenses and compensation paid?
    • A significant investment by the worker (such as purchase of tools or equipment) may indicate he or she is an independent contractor.
    • Unreimbursed expenses may suggest the worker is an independent contractor.
    • Independent contractors frequently charge flat fees and can make a profit or loss on the job.
    • An employee’s services are available to the employer, while an independent contractor’s services are available to the market.
    • The payment method (credit card, direct deposit payroll, etc.) is a factor in determining whether the worker is an employee or independent contractor.
  • What type of legal relationship exists between the payer and worker?
    • A contract for services or employment could be a determining factor.
    • If benefits are provided, the recipient is most likely an employee.
    • A temporary relationship often indicates an independent contractor, while something more permanent may be held by an employee.
    • An independent contractor will most likely advertise in the marketplace, while an employee may post availability only on job search websites.

IRS Publication 1779 and Publication 15-A give additional guidelines. If you’re still unclear you can submit a request for the IRS to determine the status of your worker.  Be aware, though, the IRS could take up to six months to answer your inquiry.

Still confused? Patrick & Raines CPAs, which offers independent contractor CFO and bookkeeping services, employs a tested team of experienced accountants who can help.

Contact us at Office@CPAsite.com or 904-396-5400.

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