1.
Employee or Independent Contractor?
It’s important that an employer know the legal definitions of employee and independent
contractor. An individual who performs services for an employer may be either. The position
should be thorougly reviewed to make sure it meets the definition of an independent contractor.
There are two main tests for determining whether an employee-employer relationship exists:
The IRS common law test uses three categories of evidence to examine who controls what
work will be done and how and when it will be done.
Behavioral control
How detailed are the instructions?
How much training does the employer provide?
The higher the level, the more likely the determination that the worker is an employee.
Financial control
Does the worker have
unreimbursed business expenses?
Does the worker have a significant financial
investment in the work?
Are the services available to the
public?
Does the worker have an opportunity for profit
and loss?
Does the worker provide his or
her own tools?
The more answers that are no, the more likely the determination that the worker is an employee.
Type of relationship
Is there a written contract?
Is the worker ineligible for employee benefits?
Is there a specific period or term
for the relationship?
Are the services an unimportant aspect of
business operations?
The more answers that are no, the more likely the determination that the worker is an employee.
The §530 reasonable basis test examines whether there is a reasonable basis for classifying
a worker as an independent contractor, based on past legal precedent (e.g., a court case or
IRS ruling).
Section 530 in the Revenue Act of 1978 allows an employer to avoid paying employment taxes
and treat a worker as an independent contractor. This test is typically used in the midst of an
IRS tax examination to determine whether an employer correctly treated certain workers as
independent contractors.
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2.
To satisfy the §530 reasonable test, you must fill all three of these requirements:
Reasonable basis
Substantive consistency
You must show that you reasonably relied on
a court case or IRS ruling issued to you or that
a past IRS audit did not force you to reclassify
workers. Alternatively, you can show that you
treated workers as independent contractors
because a significant segment of your industry
does the same. Finally, you can simply show
some other reasonable basis (e.g., relying on
the advice of an attorney or accountant with
knowledge of the facts).
You must have treated these workers, and any
similar workers, as independent contractors
in the past.
Reporting consistency
This means filing Form 1099-MISC for every
year that you paid the worker $600 or more.
Common Law Employees
Independent Contractors
Follows employer’s instructions
Agrees on job specifications
Trains within the company
Obtains own training
Hired, supervised, paid by employer
Hires, supervises and pays own staff
Works for only one employer
Available to the general public
Employer sets work schedule
Develops own work schedule
Employer furnishes materials
Furnishes own materials
Business expenses paid by employer
Pays own business expenses
Personally performs the work
May subcontract work
Is an integral part of the company
Provides peripheral services
Works on a regular basis
Works at irregular intervals
Usually works 40 hours a week
Usually works varied schedule
Is paid by the hour, week or month
Is paid by the completed job
Works at employer’s premises
Works anywhere
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