Generally, the IRS uses a common law test of control to determine whether a worker is an employee or an independent contractor. Under this test, a worker is an employee if the user of his or her services has the right to direct and control the manner and details of the worker's performance. This is determined on a case-by-case basis by evaluating a list of 20 factors:

1. Instructions
2. Training
3. Integration of worker's services into business operation
4. Personal nature of services
5. Worker's ability to retain assistants
6. Continuity of parties' relationship
7. Set hours of work
8. Full time requirement
9. Location of work
10. Sequence of tasks set by employer
11. Reports submitted to employer
12. Payment period
13. Responsibility for expenses
14. Furnishing of tools and materials
15. Investment by worker
16. Worker's opportunity for profit and loss
17. Working for more than one firm
18. Worker's services available to public
19. Employer's right to discharge
20. Right of worker to terminate relationship

If the IRS reclassifies a company's workers from independent contractors to employees, the company will be liable for income tax withholding and FICA and FUTA taxes and also usually penalties for failure to file payroll tax returns and failure to make timely deposits. Generally, the IRS assesses interest on the employer's liability for taxes and penalties. These costs can obviously be very significant!

Review the list of factors above, and contact your Rea & Associates representative for more information if you have any question about whether your workers are employees or independent contractors.

If your workers are employees and handling payroll is too time-consuming or overwhelming, Rea & Associates can provide full payroll services including processing paychecks, direct deposit, quarterly payroll tax returns and year end reports and W-2's to help you get it done and avoid costly errors.

-By Christopher A. Roush, CPA (Shareholder, Millersburg office)

Save article

Email Firm

Email to a Friend