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March 26, 2014

Independent Contractors and the IRS

Posted 3 years 242 days ago by Lisa Wallace

With the tax deadline approaching once again, it’s a good time to think about how the IRS defines an independent contractor versus an employee. The IRS uses a list of, count ‘em, 20 tests that determine whether temporary talent should be considered as an employee or a contractor for tax purposes.

You can see more information here

The IRS basically looks at three factors to determine status:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (These include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
  4. Some of these can be very gray areas indeed. For instance, if a contractor is employed on an indefinite basis, that can be construed as intent to create an employee relationship. And what exactly counts as a “key aspect of the business”? If a contractor is recruited for a temporary stint but acting effectively as CFO, would that count?

    The penalties for getting it wrong can be stiff. The employer, Ashton212 in this example, is responsible for the employee’s portion of the taxes and any penalties on those, as well as for the amount the company would have paid if the contractor had been classified as an employee from the start.

    The easiest way is to ensure that contractors are hired through a recognized agency with a history of paying taxes and benefits.

    Tracy Teale, Partner, Rina Accountancy shares, "To increase your confidence about your status as an independent contractor, we strongly suggest speaking with a CPA with experience in the area of contingency workforce. There are often nuances that bring unwanted attention from the IRS and a professional can respond to your questions and talk through your options."

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