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Small businesses, in classifying workers as independent contractors, can
trigger an audit from the Internal Revenue Service. Since smaller firms
lack the monies to challenge the Internal Revenue Service, either
through appeals through that agencey or in the federal courts, it is
imperative that these small businesses properly classify their workers.
In our workshops, we have stressed the importance of the 20-point test
for classifying workers.
The worker is generally an employee if she or he:
1. Has a continuing relationship with the employer.
2. May quit work at any time without incurring liability.
3. Works for one employer at a time.
4. Must follow employer's instructions about the work.
5. Receives training from employer or professionally hired by employer.
6. Work hours are set by employer and followed by worker.
7. Works full time for an employer.
8. Worker provides services that are integral to the business.
9. Provides services that must be personally rendered.
10. Worker cannot hire, supervise and pay her or his assistants.
11. Does work on employer's premises.
12. Submits regular reports to the employer.
13. Receives pay regularly based on time worked for employer.
14. Is reimbursed for business and traveling expenses.
15. Employer furnishes tools and materials for worker to do the job.
16. Worker does not offer services to general public.
17. Employer can fire worker at will.
18. Worker does work for one employer at a time.
19. Worker does not have a major investment in facilities used to
perform service.
20. Worker does not incur profit or loss performance of services.
As you can see from the above 20-point test, the key word is "control."
The employer controls what work must be done and how it must be done.
The above 20-point test is what the Internal Revenue Service uses to
make a determination of whether a worker is an employee or an
independent contractor. But it does not say how many yes answers it
requires before deciding a worker cannot be called an independent
contractor. Plus, some states have guidelines for classifying
independent contractors that differ from the federal government's.
Moreover, state governments and the IRS exchange information regularly
during audits, and "many times, a state audit will trigger a federal
one."
Part of the seminar had a lawyer who spoke emphatically about doing
ANYTHING to keep the IRS off your back. He had some more of those horror
stories we've all heard about the ruthlessness of the organization.
Just wanted to pass this along. When this handout was distributed, it
started me thinking about Harp-L, and the recent contributions by
everyone, but especially what Ed had posted about using 1099s to pay
workers.
later,
Steve P.
