Increase Productivty

Applying the Test

When you examine your relationship with any worker, you will probably find some facts that support IC status and other facts that support employee status. This is because ICs are rarely totally unconstrained in performing their contracts, while employees almost always have some degree of autonomy.

You need to weigh all the evidence to determine whether, looking at the relationship as a whole, evidence of control (indicating the worker is an employee) or autonomy (indicating the worker is an IC) predominates. A good way to do this is to draw up a simple chart with those factors that indicate IC status on one side and those that show employee status on the other.

The following examples are taken directly from the IRS manual on how to classify workers and are being used to train IRS auditors. They illustrate that the IRS expects to find a mix of facts and that not all factors need to point to IC status for a worker to be classified that way.

EXAMPLE: An attorney is a sole practitioner who rents office space and pays for the following items: telephone, computer, online legal research linkup, fax machine and photocopier. The attorney buys office supplies and pays bar dues and membership dues for three other professional organizations. The attorney has a part-time receptionist who also does the bookkeeping. The attorney pays the receptionist, withholds and pays federal and state employment taxes and files a Form W-2 each year. For the past two years, the attorney has had only one client—a corporation with which there has been a longstanding relationship. The attorney charges the corporation an hourly rate for services and sends monthly bills detailing the work performed for the prior month. The bills include charges for long distance calls, online research time, fax charges, photocopies, mailing costs and travel costs for which the corporation has agreed to reimburse.

Analysis: There are factors here that show control and factors that show autonomy. The attorney has a number of ongoing business expenses that give him a risk of loss—he pays for an office, supplies, professional dues and an employee receptionist. The fact that he has an employee is very strong evidence of IC status. On the other side of the ledger, he has only one client and is paid by the hour and reimbursed for certain expenses. However, hourly payment and expense reimbursement are common among attorneys, so these factors probably would not be viewed as very important by the IRS. Having a long relationship with a single client points to employee status, but this factor is probably outweighed by the factors showing IC status.

EXAMPLE: A manufacturer’s representative is the sole proprietor of a building supplies business and has an exclusive contract with a building supplies manufacturer. The representative has the sole right to the territory covered and sells only that manufacturer’s products, but did not pay anything for the right to the territory. The representative has a bachelor’s degree in civil engineering and belongs to several professional associations, paying membership dues. The representative has an office and a secretary, but the manufacturer does not reimburse for these expenses. The representative’s name appears in the Yellow Page advertisements under both the representative’s sole proprietorship name and the name of the manufacturer represented. The representative is required to provide regular trip reports to the manufacturer and attend sales meetings and trade shows conducted in the representative’s territory.

The representative bids on portions of major commercial construction contracts. These jobs require engineering skills and design work to adapt the building materials to the project plans. All bids are subject to the manufacturer’s review. Upon winning a bid, the representative engages and pays the workers who will install the building materials, providing the necessary construction bonds. The representative submits invoices to the general contractor for payment directly to the representative on forms prescribed by the manufacturer. If the general contractor fails to pay, the representative is responsible for collecting and is liable to the manufacturer for payment.

Analysis: This complex example has a real mix of factors. However, although several factors point to employee status, it’s likely the representative would be classified as an IC because he has such a strong risk of loss. He is personally responsible for hiring and paying the workers who install the manufacturer’s building materials. He is also responsible for collecting the amounts due from the building contractor customers. If the contractors fail to pay, the representative must pay the manufacturer out of his own pocket. The representative could easily lose his shirt if he can’t collect from a contractor. This enormous financial risk points strongly to IC status and likely outweighs the employee factors.

taken from; Hiring Independent Contractors: The Employer’s Legal Guide, 4th Edition