Is your contractor really independent?

• Author: Wollenberg, John

With the perception that employers are attempting to circumvent payroll taxes by classifying workers as independent contractors, the IRS has recently stepped up its efforts to more closely scrutinize this long-controversial area.

This item provides an overview of the factors examined by the IRS and offers insight into how to better secure independent contractor status.

Advantages of Independent Contractor Status

Traditionally, many consultants have considered themselves self-employed with a view toward enjoying several tax benefits. For example, by positioning themselves as independent contractors, they avoid having payroll and income taxes withheld from their paychecks. They can establish generous retirement plans, such as SEPs, Keoghs, or solo 401(k)s. They can deduct many types of business expenses unavailable to employees.

The IRS Perspective

To help determine whether a worker is an employee or an independent contractor, the IRS has relied on a 20-factor control test based on common law principles (Rev. Rul. 87-41). This test is an analytical tool only. There is no "magic number" of relevant points, and the factors merely point to facts to be considered in evaluating the extent of the employer's right to direct and control the worker.

The 20 factors to be weighed in evaluating whether an individual is an employee are:

* Instructions: A worker who is required to comply with another's set of instructions is ordinarily an employee.

* Training: Formal or informal training at an employer's expense indicates an employer-employee relationship.

* Integration: Integrating the worker's services into the business's operations generally shows that the worker is subject to control.

* Services rendered personally: If the services have to be personally rendered, the employer probably controls the means as well as the results.

* Hiring, supervising, and paying assistants: Unless the worker hires, supervises, and pays his or her own assistants (if any), the worker is likely an employee.

* Continuing relationship: The longer the relationship, the more likely the worker is an employee.

* Set hours of work: An independent contractor controls his or her own time (though with the advent of flexible hours, employees also have more input on their hours).

* Full time required: A full-time position indicates an employer-employee relationship, whereas an independent contractor works when he or she chooses.

* Working on the employer's premises: The weight of this...