written by Melinda Thurman

Follow up article to: IRS Takes Aim at Employment Tax Compliance. Click here to read.

The IRS has taken an aim at verifying businesses are accurately classifying their workers as either Independent Contractor or Employee. Determining this classification depends on the services provided by the worker. A tax difference on these classifications involve whether payroll taxes are calculated and paid by the employer or the worker is subject to self-employment taxes.

Three common law rules proving evidence of the degree of control and independence fall into the following categories:

  • Behavioral
  • Financial
  • Type of Relationship

Behavioral control refers to facts that show whether a right to direct or control how the worker does the work exists. A worker is an employee when the employer has the right to direct and control the worker.

Behavioral control factors fall into the categories of:

  • Type of instructions given
  • Degree of instruction
  • Evaluation systems
  • Training

Financial control refers to facts that show whether or not the employer has the right to control the economic aspects of the worker’s job.

Financial control factors fall into the categories of:

  • Significant investment
  • Un-reimbursed expenses
  • Opportunity for profit or loss
  • Services available to the market
  • Method of payment

Type of Relationship
Type of relationship refers to facts that show how the worker and employer perceive their relationship to each other.

The factors, for the type of relationship between two parties, generally fall into the categories of:

  • Written contracts
  • Employee benefits
  • Permanency of the relationship
  • Services provided as key activity of the business

The keys on this determination is to view 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 classification. The major consequence of treating a worker as an independent contractor when in fact the worker should be an employee is the employer liability for employment taxes.

Upon reviewing and understanding the above criteria, please evaluate the current classifications of workers for accurate employment status. Contact us today with any questions 417-881-0145.