United States

IRS continues to examine worker classification


It is the age-old conundrum for a small business owner: making the determination as to whether your worker is an independent contractor or an employee. Recently, the IRS has renewed its efforts to identify misclassified workers and collect associated tax liabilities. How do you know if your worker is properly classified?

Generally, an individual is considered an independent contractor if your business only has the right to control or direct the result of the work and not the means and methods of accomplishing the result. The IRS and many state agencies consider three aspects of control – referred to as the common law test – when determining whether an individual is an employee or an independent contractor:

  • Behavioral control: If you have a right to direct and control how the worker does the task, the individual will often be classified by the IRS as an employee.
  • Financial control: Individuals who must make a significant financial investment in the work (e.g., by buying equipment or supplies) often are classified by the IRS as independent contractors. Likewise, individuals who could either realize a profit or a loss typically are classified as independent contractors.
  • The type of relationship between the parties: If you offer the individual benefits, such as paid leave or insurance, he or she will often be classified by the IRS as your employee.

In addition, the majority of the states use the ABC test, which entails a more stringent assessment of worker classification. Finally, the Department of Labor applies an economic realities test to ensure that individuals are protected as employees under several federal employment acts. See 3 tests, few answers: The not-so-simple world of worker classification for a good outline of the factors considered under each of these tests.  

The bottom line for business owners and executives? Penalties for misclassification can be substantial. It is important to review each person whom you currently classify as an independent contractor to ensure he or she still fits the definition.

Lorraine Bodden

Senior Director

Areas of focus: Payroll and Employment Tax

See more about workforce tax considerations in our business growth resource center. 

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