Independent Contractor vs. Employee
The IRS estimates that as many as 30 percent of individuals classified as independent contractors should be classified as employees (2013). The IRS is increasing audits of independent contractors and issuing fines for misclassification. How do you know if you are at risk?
There are several factors to evaluate when determining if an individual should be classified as an employee or independent contractor. The three main areas of evaluation are:
- Behavioral: how much control does the company exert of the individual? Type of instructions given, degree of instruction, evaluation systems and training.
- Financial: how is the individual paid (how often, project or hourly), expenses reimbursed, provision of tools, equipment and supplies? And to what degree is the opportunity for profit or loss.
- Type of relationship: are written contracts in place, are employee benefits provided (i.e. pension plan, insurance, vacation, etc), will the relationship continue and is the work performed a key aspect of the business? Does the individual have a viable business where services are performed for others?
If you are concerned about classification, do your research prior to an audit.