Independent Contractor v. Employer – What’s the Current Test?
A new bill in the U. S. House of Representatives would amend the Internal Revenue Code of 1986 to include a provision that would only allow employers to avoid employment tax liability if they are able to show a “reasonable basis” for applying the independent contractor status.
This test would be a big departure from the current rule, which is much stricter. Now, the IRS considers multiple factors when deciding whether a worker is classified properly. In recent years these have taken the form of a three-part test:
1) Behavioral control. For this part, the IRS considers whether a business has a right to direct and control how a worker does his or her tasks on the job. A look at “behavior control” includes a review of what type of instructions and training the employer provides to the employee.
2) Financial control. Financial control includes the degree to which a business has the right to control certain business aspects of a worker’s job. These include:
Reimbursement of expenses;
The extent of the worker’s investment;
The extent to which workers make services available to the relevant market;
How the business pays the worker; and
The extent to which the worker can realize a profit or loss.
3) Relationship. The IRS will consider the relationship between the worker and the business, including:
the presence or absence of a written agreement establishing the worker as an independent contractor;
benefits such as vacation days, insurance, and pension pay;
the expectation of permanency in the relationship; and
the extent to which services performed by the worker are a key aspect of the company’s regular business.
Please contact Caroline Lindsey, Associate Attorney with Anderson Jones, PLLC at (919) 277-2541 or by email, if you have any questions regarding this or any other legal issue!