This is a high stakes strategy. Independent contractors get paid the gross amount owed them or their company, and its a total business expense to the contractor without payroll tax deductions.
Employees have federal and state taxes deducted and paid for by both the employer and the employee.
That’s a big bet, approximately 7-8% of the payroll is paid out for taxes by the employer and the same amount for the employee if he is determined to be an employee. Thus many creative business owners contrive every possible way to satisfy the requirement and create Independent Contractor status on what would normally be employee situations .
There is an IRS form which can be submitted in which the service predetermines whether or not an individual is an employee or Independent Contractor, although the forms and decisions made are one sided leaning towards everyone is an employee other then licensed and regulated professionals and bonafide business enterprises.
The general test is the degree of control the alleged employer has over both the process and the conclusion delivered by the alleged employee. The more control over the would be Independent Contractor, the less likelihood that Independent Contractor status will be established and the more likely he will be deemed an employee.
This is a huge opportunity to avoid not only payroll taxes but Workman’s comp insurance and other benefits that come with employee status including health insurance and vacation and holiday time, overtime, etc. This is therefore an important strategy to implement carefully and knowledgeably by the parties involved after serious consideration to the facts.
It is also a situation which is frequently contested and more frequently lost by the employer when Independent contractor status is claimed but eventually denied.
Here are some of the aspects viewed as controlling in determining if a worker is an employee or an independent contractor.
1. Who controls the time, place and dates as well as equipment used by the worker.
2.Who determines how the job is done, what materials are used, who hires and controls the sub contractors and service providers. Who determines how the process is accomplished, who designs the tools used and who determines what the results should be.
3. Whose equipment is used, who cares for and pays for replacement.
4. How the payment for services is assessed.
5, If the worker has other clients, and make his own schedule.
6. If there is a professional skill involved, a professional business organization and a written contract.
7. If there is any risk or investment or chance for loss involved on the part of the worker.
8. Worker has his own letter head, own billing system, bills sent, etc.
As you can well imagine every prudent business person would prefer to have his employees redefined an independent contractors…
The IRS has the opposite in mind and thus the battle lines are drawn. Control is the issue and it is the burden of the employer /employee to win the day with decisive argument determining that control vests with the worker thus bestowing Independent Contractor status on him and thus no longer requiring tax deductions and insurance payments.
So be prepared to argue divested control and see what happens, organize yourself accordingly and the more effort put into the response the better the result will be.
In the end the truth will usually be reflected in the outcome, if the employee controls his working environment he will be awarded independent contractor status, although it is definitely an uphill battle.
Call if you need help 413-549-2966.
