From Crain’s Detroit Business —
The IRS recently developed a three-part test to determine whether a worker should be classified as an independent contractor or an employee. The test considers all information that illustrates the company’s degree of control and the worker’s degree of independence. The three categories consist of 1) behavioral control; 2) financial control and 3) the type of relationship between the parties. Within each category, there are several issues to consider. The behavioral control category evaluates whether the employer controls or has the right to control what the worker does and how he or she performs the job. The four behavioral control factors are a) the type of instructions given, b) the degree of instruction, c) evaluation systems and d) training.
The financial control category reviews facts that illustrate whether the company has a right to control the business aspects of the work. These five factors consist of a) significant investment, b) unreimbursed expenses, c) opportunity for profit or loss, d) services available to the market and e) method of payment.
The type of relationship category examines how the parties perceive their relationship. These four factors include a) the existence of written contracts, b) whether employee benefits are provided, c) the permanency of the relationship and d) whether the services provided are a key activity of the business. Additional information about the IRS test is at irs.gov.
The IRS does not consider one factor in isolation when deciding whether a worker is appropriately classified but considers all of these factors in totality to determine whether a worker should be legally treated as an employee. Merely having an agreement stating that a worker is an independent contractor does not automatically mean the person will be considered an independent contractor.
If a worker is considered an employee under the IRS test, the company has obligations such as paying and withholding employment taxes. If a worker is considered an employee under other state and federal laws, the company is responsible for other obligations, such as paying minimum wage, paying unemployment insurance tax, and providing workers’ compensation, health care and other benefits.
Read the full story at Independent contractor or employee: Who is working for you?
- Independent Contractors vs. Employees – Resource Magazine (nathansgibson.org)
- IRS Topic 762 – Independent Contractor vs. Employee (nathansgibson.org)