Tax Issues 5

What about independent contractors? I do a lot of work as an independent contractor for one company. Could the IRS call me an employee and deny my business deductions?

The independent contractor issue can be complicated. Many companies try to call employees independent contractors to avoid the hidden costs of having employees. Those hidden costs can easily amount to one-third or more of the actual salary paid to the worker. They include such things as the unemployment taxes, employer's share of FICA, and workers' compensation, as well as things like medical insurance, sick pay, vacation and holiday pay, pension plans, and so on.
To prevent this kind of abuse, the IRS has tried to establish criteria to distinguish employees from independent businesspeople. Generally speaking, these criteria say that if you are a writer, attorney, speaker, consultant, or other professional or tradesperson who operates independently and offers services to the public (in other words, to multiple clients), you are not an employee. However, the IRS also says you will be considered an employee if the client company has the right to control and direct the means and methods of accomplishing the work you perform for them.
To clarify these two broad rules, the IRS looks at a variety of factors on a case-by-case basis to determine whether an individual is an employee or independent contractor. The importance of each factor varies with the occupation and the individual circumstances under which the services are rendered. Here are the factors and how the IRS views each:

1. Instructions: An employee is told when, where, and how to do the work; an independent contractor performs work without being told when, where, or how to do the job.
2. Training: Training is for employees; independent contractors would use their own methods, receiving no training from the client.
3. Integration: If an individual's services or job is integrated into the daily business operations (the business can't operate well without the service), the person performing the service is considered an employee.
4. Performance: An employee is expected to personally perform the job they've been assigned; an independent contractor may assign others to do the work.
5. Assistants and cost of goods: An employee would not bear the cost of hiring and training assistants or employees and does not pay for cost of goods out of his/her own pocket. An independent contractor would be responsible for hiring, training, supervising, and paying assistants and for paying the costs of materials as part of the job contract.
6. Work relationship: An employee performs work frequently at recurring intervals as part of a continuing relationship with a company; independent contractors don't maintain similar continuing relationships.
7. Schedule: The employee must keep hours set by the employer; the contractor chooses his/her own hours.
8. Hours worked: An employee is likely to work full-time for only one company; a contractor is available to work for multiple companies.
9. Location of work: An employee works on the employer's premises or on a route specified by the employer; the contractor is not restricted to working on the client's premises.
10. Sequence of work: The employee follows company instructions and routines; the independent contractor does work in whatever sequence he/she deems best.
11. Reports: The employee must account to the employer for daily actions and activities; the contractor does not account to the client for his/her daily activities.
12. Method of payment: Employees are usually paid by the hour, week, month, or year; contractors are usually paid by the job or on straight commission.
13. Expenses: Employees have business and travel expenses paid for them by employers; independent contractors pay their own business and travel expenses.
14. Tools: The employee is often (but not always) furnished with significant tools or equipment to do a job; the contractor supplies his/her own tools or equipment.
15. Investment: Employees have no significant investment in what they do; independent contractors put significant investment in equipment or facilities used to perform services.
16. Profit or loss: The employee gets paid and is not subject to losses. Independent contractors do not get salaries; they make a profit or suffer losses.
17. Number of business customers: The employee works with one business or one primary business at one time; contractors may perform services for multiple companies at once.
18. Availability: An employee is not available to others for work; a contractor is available to work for multiple companies.
19. Ability to be fired: An employee can be fired; a contractor has to be paid if he/she produces the results specified in the contract.
20. Right to quit: An employee can quit without incurring liability; a contractor is legally obligated to meet contract terms or risks financial loss

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